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FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required) For the Fiscal Year Ended October 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _____ to______
Commission File Number 001-10684
International Game Technology
(Exact name of registrant as specified in its charter)
Nevada 88-0173041
(State of Incorporation) (I.R.S. Employer Identification No.)
9295 Prototype Drive, Reno, Nevada 89511
(Address of principal executive offices)
Registrant's telephone number, including area code: (775) 448-7777
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, Par Value $.000625 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 26, 1999:
$1,506,248,283
The number of shares outstanding of each of the registrant's classes of common
stock, as of November 26, 1999:
85,982,263 shares of Common Stock, $.000625 Par Value
Part III incorporates information by reference from the Registrant's definitive
Proxy Statement to be filed with the Commission within 120 days after the close
of the Registrant's fiscal year.
Table of Contents
Part I
Page
Item 1. Business 2
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 7a. Quantitative and Qualitative Factors about Market Risk 33
Item 8. Consolidated Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 68
Part III
Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Beneficial Owners and Management 68
Item 13. Certain Relationships and Related Transactions 68
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 68
Signatures 71
Part I
Item 1. Business
General
International Game Technology was incorporated in December 1980 to acquire the
gaming licensee and operating entity, IGT, and to facilitate its initial public
offering. In addition to its 100% ownership of IGT, International Game
Technology has the following directly or indirectly wholly-owned subsidiaries:
Barcrest K.K. ("Barcrest-Japan"); I.G.T. - Argentina S.A. ("IGT-Argentina");
I.G.T. (Australia) Pty. Limited ("IGT-Australia"); IGT do Brasil Ltda.
("IGT-Brazil"); IGT-Europe B.V. ("IGT-Europe"); IGT-Iceland Ltd.
("IGT-Iceland"); IGT Japan K.K. ("IGT-Japan"); IGT-UK Limited ("Barcrest");
International Game Technology - Africa (Proprietary) Limited ("IGT-Africa");
International Game Technology S.R. Ltda. ("IGT-Peru"); and Sodak Gaming, Inc.
("Sodak").
Unless the context indicates otherwise, references to "International Game
Technology," "IGT," "we," "our" or "the Company" include International Game
Technology and its wholly-owned subsidiaries and their subsidiaries. Our
principal executive offices are located at 9295 Prototype Drive, Reno, Nevada
89511; our telephone number is (775) 448-7777.
IGT is one of the largest manufacturers of computerized casino gaming products
and operators of proprietary gaming systems in the world and was the first to
develop computerized video gaming machines. Since its founding in 1980, IGT has
principally served the casino gaming industry in the United States. In 1986, IGT
began expanding its business internationally, and in addition to its production
in the United States, currently manufactures its gaming products in Australia
and the United Kingdom and through a third party manufacturer in Japan. IGT also
maintains sales offices in legalized gaming jurisdictions globally, including
Argentina, Brazil, New Zealand, Peru, South Africa and The Netherlands. IGT is
currently licensed to provide gaming products in every significant legalized
gaming jurisdiction in the world.
The following trademarks are owned by IGT and are registered with the US Patent
and Trademark Office: International Game Technology; IGT; the IGT logo with
spade design; Double Diamond; Megabucks; Player's Edge-Plus; and Red, White &
Blue. IGT also owns the trademark rights to the following: Game King; iGame with
Design (interactive gaming); IGS; IGT Gaming systems; MegaJackpots; Nickels
Deluxe; Slot Line; S-Plus Limited Series; Super Megabucks; Totem Pole; Vision
Series; and Vision Slot. Elvis and Wheel of Fortune are registered trademarks of
Califon Productions, Inc. Jeopardy! is a registered trademark of Jeopardy
Productions, Inc. Five-Deck Frenzy is a trademark of Shufflemaster.
In March 1998, IGT completed the purchase of Barcrest Limited ("Barcrest"), a
Manchester, England-based manufacturer and supplier of gaming related amusement
devices and formed IGT-UK. Also in March 1998, IGT purchased certain assets of
Olympic Amusements Pty. Limited ("Olympic"), a manufacturer and supplier of
electronic gaming machines, gaming systems and other gaming equipment and
services to the Australian gaming market. The Olympic business was consolidated
with IGT-Australia.
In September 1999, IGT completed the acquisition of Sodak Gaming, Inc.
("Sodak"). Sodak distributes and finances gaming products, principally IGT
products, and provides wide-area progressive systems primarily to Native
American casinos. Sodak also provides financing for gaming ventures on Native
American lands.
Business Lines
IGT operates principally in two lines of business: (1) the development,
manufacturing, marketing and distribution of gaming products, which we refer to
as "Gaming Product Sales," and (2) the development, marketing and operation of
wide-area progressive systems, which we refer to as "Gaming Operations."
Item 1. Business (continued)
Gaming Product Sales
IGT manufactures domestically a broad range of microprocessor-based gaming
machines, consisting of traditional spinning reel slot machines, video gaming
machines and government-sponsored and other video gaming devices. For our
domestic and certain international markets, we offer 400 recognized trademarked
game themes including Double Diamond; Red, White and Blue; Five Times Pay; Bonus
Poker; and Deuces Wild. We typically sell our machines directly or through
distributors to casino operators, but may in certain circumstances finance the
sale or lease of equipment to the operator. In the North American gaming market,
IGT holds an estimated 61% share of the installed base of both casino style and
government sponsored gaming machines and an estimated 72% share of the installed
base of casino gaming machines. We believe our market share is the result of our
research and development in video and slot technology, the efforts of our
experienced sales force and our focus on customer service and product
reliability.
Gaming machines for the casino markets in Europe, South Africa and South America
are similar to the spinning reel and video games in the North American markets.
Features differ in each market but the games are generally multiple coin games
with random outcomes paid in coins returned to the customer. In some
jurisdictions, the machines pay out in the form of tickets, vouchers or tokens,
rather than coins. Gaming machines in Australia, Japan and the United Kingdom
markets, however, are produced locally and differ substantially from domestic
machines.
In addition to gaming machines, IGT develops and sells computerized casino
management systems which provide casino operators with slot and table game
accounting, player tracking and specialized bonusing capabilities. We also
develop and sell specialized proprietary systems to allow the lottery
authorities to monitor video lottery terminals. We derive revenue related to the
operation of these systems and collect license and franchise fees for the use of
the systems. In fiscal 1999, gaming product sales produced 62% of total
revenues.
Gaming Operations
Approximately 4% of the domestic installed base of gaming machines generate
recurring revenue including wide-area progressive systems and stand-alone
machines in which the manufacturer participates in the revenue from the machine
on a percentage or fee basis. Wide-area progressive systems are
electronically-linked, inter-casino systems that link gaming machines to a
central computer, allowing the system to build a "progressive" jackpot with
every wager made throughout the system until a player hits a winning
combination. In the North American market, IGT estimates it holds more than a
70% share of the installed base of these machines.
We have developed and operated wide-area progressive systems for over 10 years.
As of October 2, 1999, IGT operated 137 such systems in 17 jurisdictions under
such brand names as Jeopardy!, Megabucks, Quartermania and Wheel of Fortune. IGT
operates some of these systems under joint marketing alliances, principally with
Anchor Gaming ("Anchor") and other gaming companies. The purpose of these
strategic alliances is to combine the game development efforts of other
companies with IGT's wide-area progressive system expertise. Wide-area
progressive systems are designed to increase gaming machine play for
participating casinos by giving players the opportunity to win larger or more
frequent jackpots than on machines not linked to progressive systems. Win (net
earnings to the operator) per machine on machines linked to progressive systems
are generally higher than on stand-alone machines. In fiscal 1999, gaming
operations produced 38% of total revenues.
See Note 19 of Notes to Consolidated Financial Statements for information
concerning the revenues, operating results and identifiable assets of our two
principal lines of business and operations by geographic region. The
consolidated financial statements include the accounts of International Game
Technology and all of its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Item 1. Business (continued)
Business Strategy
IGT's engineering and game design staff continually work to provide innovation
in slot and video technology. IGT invested approximately $45.5 million in
research and development in fiscal 1999. Innovations from research and
development increase our gaming machines' earning potential and entertainment
value by: improving the ease and speed of play, using local game preferences,
enhancing entertainment via larger jackpots, sound, bonus features and overall
aesthetics and decreasing down time through improved product reliability.
Historically, the introduction of innovative products coupled with the addition
of new casinos have increased the replacement market by encouraging existing
casinos to upgrade to new slot products in order to remain competitive.
To capitalize on future opportunities, management is committed to:
o innovative new product development such as our Game King, iGame-Plus,
Vision Series, S-Plus Limited lines and S2000;
o development and rollout of new wide-area progressive systems such
as Elvis, Jeopardy!, Party Time and Wheel of Fortune;
o continued focus on customer service and reliability through our more than
400 trained sales and service personnel;
o increased focus on opportunities to roll out IGT products and systems
into new markets including international jurisdictions;
o enhancement of our industry-leading game library with strong new offerings
for all product lines; and
o ongoing improvements to our IGT Gaming Systems products that answer
industry demands for improved operational efficiencies.
Risk factors and cautionary statement for purposes of the "safe harbor"
provisions of the private securities litigation reform act of 1995:
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to analyses and other information which are based on forecasts
of future results and estimates of amounts not yet determinable. These
statements also relate to our future prospects, developments and business
strategies. These forward-looking statements are identified by their use of
terms and phrases such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," "predict," "project," "will" and similar
terms and phrases, including references to assumptions.
Such forward-looking statements and IGT's operations, financial condition and
results of operations involve known and unknown risks, and uncertainties. Such
risks and factors include, but are not limited to, the following:
o a decline in demand for IGT's gaming products or reduction in the growth
rate of new and existing markets;
o delays of scheduled openings of newly constructed or planned casinos;
o the effect of changes in economic conditions; o a decline in public
acceptance of gaming;
o unfavorable public referendums or anti-gaming legislation;
o unfavorable legislation affecting or directed at manufacturers or
operators of gaming products and systems;
o delays in approvals from regulatory agencies;
o political and economic instability in developing international
markets for IGT's products;
o a decline in the demand for replacement machines;
o a decrease in the desire of established casinos to upgrade machines in
response to added competition from newly constructed casinos;
o a decline in the appeal of IGT's gaming products or an increase in the
popularity of existing or new games of competitors;
o the loss of a significant distributor;
o changes in interest rates causing a reduction of investment income
or in market interest rate sensitive investments;
o loss or retirement of our key executives;
Item 1. Business (continued)
o approval of pending patent applications of parties unrelated to IGT that
restrict the ability of IGT to compete effectively with products that are
the subject of such pending patents or infringement upon existing patents;
o the effect of regulatory and governmental actions;
o unfavorable determination of suitability by gaming regulatory authorities
with respect to our officers, directors or key employees;
o the limitation, conditioning, suspension or revocation of any of our gaming
licenses;
o fluctuations in foreign exchange rates, tariffs and other barriers;
o adverse changes in the credit worthiness of parties with whom IGT has
forward currency exchange contracts;
o the loss of sublessors of the leased properties no longer used by IGT;
o IGT's inability to successfully remedy the Year 2000 readiness issue;
and,
o with respect to legal actions pending against IGT, the discovery of facts
not presently known to IGT or determinations by judges, juries or other
finders of fact which do not accord with IGT's evaluation of the possible
liability or outcome of existing litigation.
We do not undertake to update our forward-looking statements to reflect future
events or circumstances.
IGT incurred significant additional indebtedness in 1999
In May 1999, we completed the issuance of $1.0 billion of Senior Notes. Our
significant additional indebtedness could have important consequences,
including: increasing our vulnerability to general adverse economic and industry
conditions; limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and other general corporate
requirements; requiring a substantial portion of our cash flow from operations
for the payment of interest on our indebtedness and reducing our ability to use
our cash flow to fund working capital, capital expenditures, acquisitions and
general corporate requirements; limiting our flexibility in planning for, or
reacting to, changes in our business and the industry; and disadvantaging us
compared to competitors with less indebtedness.
Our ability to meet our debt service obligations on the Senior Notes and our
other indebtedness will depend on our future performance. In addition, our bank
revolving line of credit requires us to maintain specified financial ratio
tests. Our ability to maintain such ratio tests will also depend on our future
performance. Our future performance will be subject to general economic
conditions and to financial, business, regulatory and other factors affecting
our operations, many of which are beyond our control. If we were unable to
maintain the financial ratio tests under the bank revolving line of credit, the
lenders could terminate their commitments and declare all amounts borrowed,
together with accrued interest and fees, to be immediately due and payable. If
this happened, other indebtedness that contains cross-default or
cross-acceleration provisions, including the Senior Notes, may also be
accelerated and become due and payable. If any of these events should occur, we
may not be able to pay such amounts and the Senior Notes.
National Gambling Impact Study Commission
The National Gambling Impact Study Commission (the "NGIC") was created in August
1996 to conduct a comprehensive legal and factual study of the social and
economic impacts of gambling on federal, state, local and Native American tribal
governments and on communities and social institutions. On April 28, 1999, the
NGIC voted 5-4 to recommend "a pause" in the growth of legalized gambling and
encourage state and local governments to form their own gambling study
commissions. The NGIC released its Final Report in June 1999. The Report
concluded that gaming issues, except Internet gaming, are not to be settled at
the national level, but rather are more appropriately addressed at the state,
tribal and local levels. IGT is unable, at this time, to determine the ultimate
disposition of any of the recommendations contained in the Final Report or the
impact of the results of this Report on IGT.
Item 1. Business (continued)
Gaming Product Sales
IGT designs, manufactures and markets computerized casino gaming products and
systems for both domestic and international markets. In domestic markets, we
target the traditional casino gaming market and the government-sponsored video
machine market. In international markets, we target the amusement with prize,
casino-style, private clubs, gaming-hall and government-sponsored video machine
markets.
Description of Gaming Product Sales
IGT's innovations in slot and video technology have increased the earning
potential of our gaming machines by improving the ease and speed of play, using
local game preferences, enhancing entertainment via sound, bonus features and
overall aesthetics and decreasing downtime through improved reliability and
added service features. All of IGT's new gaming machines offer a wide variety of
games, innovative designs, sophisticated security features, self-diagnostic
capabilities and various accounting and data retention functions. In addition,
IGT's engineering and game design staff continually provide technological
improvements and ongoing game development, while IGT's graphic design and
silkscreen departments customize the visual aspects of the product for each
customer.
Over the past decade, advancements in gaming machine technology, the advent of
large, theme-based casinos and growth in the number of jurisdictions with
legalized gaming have attracted a greater number of North American players to
slot and video machines. IGT estimates that slot machine revenue accounts for
nearly 70% of total casino revenues. IGT was the first to develop computerized
video gaming machines under the Players Edge Plus trademark, and today sells a
variety of different video and spinning reel games. Casino operators seek out
machines with enhanced entertainment value such as secondary games or bonusing
features, superior graphics and audio and recognizable game themes. Multi-line,
multi-coin video-based games are currently rated the most popular games on the
floor. In response to this trend, IGT's newest product lines employ advanced
technology to incorporate enhanced entertainment and communication features
while retaining many familiar and popular features of older games. These new
product lines include: The Game King video platform, which offers a multimedia
presentation with a touch screen monitor; iGame Plus, an interactive video game
with graphics in a highly secure and reliable multi-game package; and the Vision
Series and S2000 spinning reel platforms, which combine a high-speed processor,
interactive full-color liquid crystal display and digital stereo sound. As these
new games are installed, the disparity between the older and newer machines on
the casino floor widens, and the replacement cycle is stimulated.
IGT offers the Game King video product platform in domestic and international
markets. The Game King product line offers interactive game play features and
graphics in a highly secure and reliable multi-game video package. Game King
offers single game video slots and poker including the popular Triple Play Poker
game.
Several enhanced versions of the iGame video platform were introduced at the
1999 World Gaming Congress. This platform supports multi-line, multi-coin video
slots, poker and keno with bonusing features and digital stereo sound.
IGT continues to introduce new game themes for its Vision Series machines
including the S2000. Vision sales totaled 19% of unit shipments domestically in
fiscal 1999. The Vision Series machine integrates traditional spinning-reel
games with a state-of-the-art liquid crystal display ("LCD") to graphically
display bonus features, game prompts and marketing messages and offers CD
quality sound and additional memory. While the Vision Series looks and feels
similar to the industry standard S-Plus slot machine, it provides enhanced
functionality to the casino operator and the player. Vision, like the Game King,
utilizes an advanced 80960 Intel processor to provide more application-rich
programs. Casino operators have increased game flexibility and customization
opportunities with the Vision Series. The Vision Series is approved for sale in
all US gaming jurisdictions as well as jurisdictions within Canada, Europe and
South America.
Item 1. Business (continued)
Our newest product, the EZ Pay Ticket System, targets the casinos' demand for
cashless gaming. The most comprehensive version of this product will provide
casino operators with a system allowing machines to print tickets in place of
dropping coins from the hopper as well as the traditional coin-drop payout.
Casinos will have the option to use both hoppers and tickets in IGT's machines
that are connected to the EZ Pay Ticket System. We believe this offers casino
operators and players the most flexibility while the industry explores the use
of tickets. The utilization of tickets is designed to reduce many of the
inconveniences associated with coin handling and hopper fills which in turn may
allow casinos to reduce labor costs. EZ Play machines will also enable the
player to select any denomination he or she prefers on a single EZ Play machine.
We will begin a field test of our EZ Pay system at a Las Vegas casino in early
calendar 2000. To further promote cashless gaming, IGT announced in September
1999 an agreement with Alliance's Bally Gaming, Inc. ("Bally"), to cross-license
patents and share protocol relating to cashless gaming upon regulatory approval.
To do so will enhance compatibility across the IGT and Bally product lines.
Gaming machines for the casino markets in continental Europe, South Africa and
South America are similar to the spinning reel and video games in the North
American market. Gaming machines in Australia, Japan and the United Kingdom
markets, however, differ substantially from domestic machines. Gaming machines
sold in Australia are exclusively video and utilize tokenized play, allowing a
machine to play any coin without changing hardware. Australian machines also
include enhanced features such as free games, second screen animations and
double up and bonusing features. The Australian gaming machines are typically
multi-reel, multi-line games with low denominations. In the United Kingdom, IGT
manufactures and sells amusement with prize ("AWP") machines. An AWP machine is
a game of chance with low stake wagering for amusement with low value cash
prizes, typically under $25. In the Japanese market, IGT manufactures and sells
pachisuro machines. A pachisuro machine is a three reel slot machine played with
tokens and is considered a skill game which allows the player to control the
stopping of the reels.
In fiscal 1999, IGT continued installing the IGT Gaming System ("IGS") which
supports casinos' control and information needs. IGS is a 14 module integrated
casino system which includes player tracking, pit cage and credit, and slot
management, plus specialized modules, including bus scheduling and events
management. IGS is operational, approved and marketed in most domestic
jurisdictions as well as Australia, Canada and South Africa. In fiscal 1998, IGS
was marketed with components that were supplied by Acres Gaming. IGT has
discontinued marketing the Acres components but continues to support customers
who purchased such equipment. The components formerly supplied by Acres Gaming
are now provided directly by IGT.
The following schedule sets forth net revenues derived from gaming product sales
for the fiscal years ended:
October 2, September 30, September 30,
1999 1998 1997
(Dollars in thousands)
Gaming products
Video products $189,625 $177,804 $192,879
Spinning reel slot 162,310 161,716 183,094
Amusement with prize 78,947 32,225 -
Pachisuro 55,328 17,466 20,569
Other gaming products 1 90,388 87,813 64,608
-------- -------- --------
Total product sales $576,598 $477,024 $461,150
======== ======== ========
1 Other gaming products includes revenues from gaming systems, lottery systems,
parts, equipment and service.
Item 1. Business (continued)
Demand for Gaming Products
Demand for IGT's gaming products comes principally from four sources: the
establishment of new gaming jurisdictions; expansions of existing casinos;
addition of new casinos within existing gaming markets; and the replacement of
older machines. The replacement cycle is driven primarily by competition in the
casino industry to provide the customer with more entertaining and sophisticated
games. To maximize our opportunity in the replacement market, we are increasing
the number of new games released each year and focusing our product development
efforts on creating games that provide enhanced entertainment value.
Technological advances, new designs, improvements in visual characteristics, the
development of new games, general wear and tear and the evolving preferences of
casino patrons also drive replacement. The construction of new casino properties
also has an impact on the replacement machine market since, historically, the
addition of new properties has encouraged existing casinos to upgrade to new
slot products in order to remain competitive. Demand for replacement products is
also dependent, in part, upon the willingness of casinos to incur the costs
associated with replacing existing gaming machines with new machines.
Product Development
The most significant factor influencing the purchase of all types of gaming
machines is player appeal followed by a mix of elements including service,
price, reliability, technical capability and the financial condition and
reputation of the manufacturer. Player appeal is the combination of machine
design, hardware, software and play features that ultimately improves the
earning power of gaming machines and the operator's return on investment.
To increase the player appeal of our machines, we have made significant
investments in research and development of products tailored toward the specific
demands of our customers as well as the users of our products. In this context,
IGT has for a number of years developed annually more than 25 different game
themes, which are tested to measure player appeal. In 1999, IGT debuted more
than 40 new offerings, most of which were directed at the growing multi-line,
multi-coin video slot market. As with all new games, these machines are subject
to regulatory approval. Using our Megatest, an on-line computerized testing and
monitoring system, to evaluate and forecast acceptance of new products, IGT will
be introducing new games throughout fiscal 2000. Megatest uses a central
computer to monitor the performance of games placed in a representative sample
of casinos throughout the state of Nevada. The Megatest program allows IGT to
test more games with greater accuracy and in a shorter time frame and results in
the release of higher-performing games.
In international markets, our strategy is to respond to developing markets with
local presence, customized games, new product introductions and local production
where feasible. For the European casino market, Barcrest has designed the
"Enhanced" series of reel-based, casino-style games to augment the current
product offerings in the market. The Enhanced machine incorporates topbox
technologies designed in the UK and will be marketed by IGT-Europe next year.
Topboxes are attached to the top of our casino-style machines to add bonus
features. In Australia, a new product strategy will replace several platforms
with one common platform with enhanced technologies. This new product will
become the IGT-Australia standard and will be supported by two game design
centers. In Japan, Barcrest-Japan recently was granted permission to manufacture
domestically. This will allow them to utilize some of the base hardware from
their sister company, IGT-Japan, and take advantage of economies of scale.
North American Markets
In the last decade, the increased legalization of gaming in new jurisdictions,
expansion in existing gaming markets and growing popularity of gaming as a
leisure activity has influenced demand in North America and presented growth
opportunities for IGT. The introduction of riverboat gaming in the Midwest US,
the expansion of Native American casino gaming and the growth in the Nevada,
Canadian and non-casino government-sponsored gaming markets have all expanded
the market for gaming machines. While IGT anticipates future growth in the
gaming industry, the rate of growth in the North American marketplace has
diminished since the substantial growth experienced in the early 1990's.
Item 1. Business (continued)
The total installed base of gaming machines and our estimated market share in
segments of the North American gaming market at October 2, 1999 are estimated by
IGT as follows:
IGT % of Machine Sales
Installed Base Installed by IGT
Total IGT Base 1999 1998
Casino style
Nevada 208,000 154,000 74% 13,600 14,100
Midwest (riverboat) 101,200 81,000 80% 6,900 6,400
Native American 86,100 59,400 69% 8,500 5,900
Atlantic City 36,400 20,600 57% 1,100 2,700
Canada 29,800 16,700 56% 5,400 3,500
Cruise ships 21,200 15,900 75% 1,200 2,200
Colorado 13,700 11,000 80% 1,300 2,400
Other 2,300 1,800 78% -- --
------- ------- ------- ------- -------
Total 498,700 360,400 72% 38,000 37,200
------- ------- ------- ------- -------
Non-casino government
sponsored 142,800 31,500 22% 3,100 600
------- ------- ------- ------- -------
Total North America 641,500 391,900 61% 41,100 37,800
======= ======= ======= ======= =======
IGT's machine sales in North America increased by approximately 3,300 units in
fiscal 1999 as compared to fiscal 1998 due to expansion of racetracks and
charity casinos in Canada, the introduction of gaming in Michigan and Washington
Native American markets, and growth in West Virginia racetracks. Slower
regulatory approvals and fewer new casino openings contributed to slower growth
in certain domestic jurisdictions including Atlantic City, Colorado, Miami and
Northern Nevada.
Nevada
Throughout the 1990s, the addition of new casinos with enhanced entertainment
and leisure activities including upscale retail and dining establishments and
elaborate shows, has increased demand for our machines in the Nevada market. The
expansion or refurbishment of existing operations and replacement of older
gaming machines has also increased demand for our machines in the Nevada market.
In fiscal 1999, IGT provided gaming machines to four major new Las Vegas
casinos: The Venetian, Mandalay Bay, Paris Resort and The Resort at Summerlin.
In addition, several other Nevada properties underwent smaller-scale expansions.
The majority of the sales in fiscal 2000 are expected to be for expansions and
replacements since there are no major new casino openings scheduled for the
year.
Midwest Gaming
Riverboat-style gaming began in Iowa in 1991 and currently is operating in
Illinois, Indiana, Iowa, Louisiana, Mississippi and Missouri. A new dockside
casino opened in Mississippi in early 1999 and a Hollywood Park casino is
expected to open in Indiana by 2001. Detroit passed gaming legislation in fiscal
1999 allowing two temporary casinos to open. IGT provided gaming machines to
both properties, the MGM and Atwater/Circus Circus properties. We also have
commitments for product purchases from Greektown in Detroit, which is expected
to open in fiscal 2000. The permanent casinos are expected to add 4,000 machines
to the market in 2001 and after.
Item 1. Business (continued)
Atlantic City
The Atlantic City market consists of 12 large casinos which are concentrated in
the mature boardwalk area and the marina district. During fiscal 1999, no new
casinos opened in Atlantic City, nor are there any new openings planned in the
near term. Within the next two to three years, however, MGM, Mirage Resorts and
Boyd Gaming have announced plans to construct new casinos in Atlantic City. In
addition, Trump Hotels and Casino Resorts plans to raze the World's Fair Casino
and replace it with a new casino. IGT does not have commitments for product
purchases with these casinos. As in Nevada, expansion in this market may
contribute to demand for replacement machines in the existing casinos.
Native American Gaming
Casino-style gaming continued to expand on Native American lands during fiscal
1999. Native American gaming is regulated under the Indian Gaming Regulatory Act
of 1988 which permits specific types of gaming. Pursuant to these regulations,
permissible gaming devices are denoted as "Class III Gaming" which requires, as
a condition to implementation, that the Native American tribe and the state
government in which the Native American lands are located enter into a compact
governing the terms of the proposed gaming. We place machines only with Native
American tribes who have negotiated compacts with their respective states and
have received approval by the US Department of the Interior.
IGT, via Sodak, began selling machines to authorized Native American casinos in
1990 and to date, has sold machines or components to Native American casinos in
17 states. Sodak maintained a distributor relationship with IGT from 1990 until
September 1999 when IGT acquired Sodak. Sodak also provides financing for its
product sales and, in some instances, has participated in the development,
equipping, and financing of gaming ventures, such as Harrahs' Phoenix Ak-Chin
casino in Arizona, from which Sodak participates in Harrahs' management fee.
In August 1999, the California Supreme Court overturned Proposition 5 which
would have allowed Native American gaming in California. In response to this
ruling, the Governor and the state legislature have placed a constitutional
amendment on the March 2000 ballot that exempts tribes from constitutional
prohibitions against casino gaming in California and allows the Governor to
compact with the tribes for operation of traditional slot machines. This ballot
measure which is supported by both political parties, the Governor, the Attorney
General, and the tribes, would allow slot machines to be operated by the tribes.
The Governor, with the legislature's approval, has entered into compacts with 57
California tribes contingent upon passage of the constitutional amendment. As in
all territories, we would not commence sales until the compacts receive US
Department of Interior approval following passage of California's constitutional
amendment. This market potential is estimated at 43,000 machines.
Gaming expanded to Washington state in 1999 where leaders of 19 tribes and the
state Governor signed compacts that permit unique electronic gaming devices at
the state's Native American casinos. Sierra Design Group manufactures and
distributes terminals and systems designed specifically to comply with the
Washington compacts. IGT has provided manufactured components to Sierra Design
Group for approximately 2,000 terminals sold thus far in Washington.
In addition to potential new markets, the replacement of older machines offers
the potential for additional sales. Native American gaming experienced rapid
expansion in 1992 and 1993, suggesting that a greater proportion of the
installed machine base may be entering the replacement cycle, based on overall
gaming industry trends.
Canada
IGT currently provides video gaming terminals for government sponsored gaming in
the Canadian provinces of Alberta, Manitoba, New Brunswick, Newfoundland, Nova
Scotia, Ontario, Prince Edward Island and Saskatchewan. IGT supplied a
management system to Manitoba. In addition to government sponsored video gaming,
the following Canadian provincial governments have approved and are operating
casino-style gaming: Alberta, British Columbia, Manitoba, Nova Scotia, Ontario,
Quebec and Saskatchewan. The Ontario Lottery Commission ("OLC") issued a request
for proposal in June 1998 for up to 13,200 mechanical spinning reel slot
machines to be placed in up to 18 horse racing tracks and four new charity
casinos. In 1999, the OLC purchased and installed 8,600 gaming machines in five
racetracks and three new casinos of Item 1. Business (continued)
which 4,400 were IGT spinning reel slot machines. British Columbia casino
expansion plans for 1999 suffered due to political issues and are not expected
to continue until at least 2001.
International Markets
IGT has sold to international markets since 1986. Traditionally, gaming in
international markets consists of casino-style gaming, private clubs and, in
some countries, smaller-scale gaming halls. We respond to the specific
requirements of a number of international jurisdictions by maintaining a local
presence and providing products appropriate for each market.
Our machine sales in international markets are as follows:
Machines Shipped by IGT
Fiscal 1999 Fiscal 1998
Jurisdiction
Australia and New Zealand 6,700 6,200
United Kingdom 1 31,500 13,100
Europe, Middle East and Africa 2,800 3,000
South Africa 1,100 1,600
Japan 27,900 9,500
Latin America 3,900 4,300
Other 1,000 1,500
------ ------
Total 74,900 39,200
====== ======
1 Includes 7,500 machines exported to Europe in fiscal 1999 and 3,500 in fiscal
1998.
Unit shipments in fiscal 1999 increased 91% from fiscal 1998 due to the IGT-UK
acquisition in March 1998 and increased sales in Japan.
Australia and New Zealand
We established manufacturing, sales, marketing and distribution operations in
Sydney in 1985 and began selling gaming machines in Australia in 1986. Australia
is the largest and most established market for gaming products outside of North
America and is primarily a video machine market. The installed base for machines
is approximately 180,000 units in both the casino market and the pub and club
market. Although Australia is predominately a replacement market, several
Australian jurisdictions have implemented or are considering the legalization or
expansion of gaming operations within their borders. Our installed base in
Australia and New Zealand is in excess of 50,000 units. In fiscal 1999, IGT had
sales of approximately 21% of the market or 6,700 machines compared to 6,200
units in fiscal 1998.
In March 1998, we acquired the assets of Olympic Amusements Pty. Limited
("Olympic"), an Australian based manufacturer and supplier of electronic gaming
machines, gaming systems and other gaming equipment and services in an effort to
enhance our existing operation. As a result of the acquisition, approximately
$100 million in intangible assets were recognized. Since the acquisition,
IGT-Australia has experienced difficulties assimilating the two companies,
including accelerating the closure of the Melbourne plant, regulatory approval
delays and management changes. We lost significant market share in Australia
since the acquisition of Olympic while our competition prospered in this market.
Item 1. Business (continued)
In an effort to return IGT-Australia to a profitable operation, we are
restructuring the company including the integration of the manufacturing
function with our domestic operation. During fiscal 1999, we wrote-off
intangible assets and recorded restructuring charges related to this plan
including inventory obsolescence and facility redundancy costs. We estimate that
additional costs will be incurred during fiscal 2000, resulting from
restructuring our sales, engineering, manufacturing and support departments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
United Kingdom
We established a manufacturing, sales, marketing and distribution operation in
Manchester, England with our acquisition of Barcrest Limited in March 1998.
Barcrest manufactures and sells AWP machines, club machines and topbox products.
AWP machines are approximately half the price of our domestic S-Plus product and
more fashion-driven. These factors contribute to a replacement cycle of less
than 18 months in the UK market.
Barcrest sells directly to customers in their largest market, the United
Kingdom. The AWP installed base in the UK, which is not expected to grow in the
near term, exceeds 220,000 throughout a variety of outlets including pubs,
clubs, bingo halls, casinos, licensed betting offices and arcades. During fiscal
1999, a change in regulations to increase the maximum stake and cash prize led
to an increase in the replacement market to approximately 57,000 machines, up
from 52,000 in the prior year. The UK demand for replacements is dominated by
the bars and licensed betting offices that require regular releases of new
machines. To meet this demand, new products are launched in the UK every four to
six weeks. In fiscal 1999, AWP sales in the UK totaled 21,500 units,
approximately 38% of the market share.
We also sell AWP products through distributors to Germany, Spain, The
Netherlands and other smaller European markets. The total European market size
for AWP products is 800,000 machines with an annual replacement market of
approximately 113,000 machines. UK manufacturers exported approximately 20,000
machines to Europe during the year, of which approximately 38% were Barcrest
products. Export opportunities arise as various governments recognize the
benefits of amusement with prize products. To capitalize upon these
opportunities, we have research and development centers in The Netherlands and
Spain which design machines for various European markets. Each model must comply
with the individual country's legislation. Machine unit sales and resulting
revenues may vary due to fluctuations in the various European currencies.
The cub machine is a simpler designed AWP product offering higher maximum wagers
and cash prices. These machines are replaced less often and are located in
private member clubs and bingo halls. The UK club market has an installed base
of approximately 60,000 units with an annual replacement market of approximately
6,500 machines. Our total club sales for fiscal 1999 in the UK were 1,300 units,
or a 21% market share.
For the US market, Barcrest designs and manufactures topboxes which then are
attached to IGT's domestically produced casino-style machines. These topboxes
add a bonus feature, which increases the player appeal of these games. Beginning
July 1999, we began providing all of our topboxes, excluding Party Time, to our
joint venture with Anchor Gaming for sale to the casino customer. The Party Time
topbox is used with IGT's domestic MegaJackpot machines.
Europe, Middle East and Africa
In 1992, we opened our Netherlands office to service the European, Middle
Eastern and African markets, excluding South Africa. In these regions, gaming is
prevalent in casinos and non-casino environments such as pubs, bars and arcades.
Within the European markets, casino-style gaming machines compete with the AWP
machines, which we sell exclusively through our Barcrest office.
Item 1. Business (continued)
We estimate, that throughout this region, the market base of legally installed
casino-style gaming machines is approximately 63,000 units. Of these machines,
we estimate our share at 18,000. The installed base and the number of units
manufactured is reduced due to the closure of the Turkish market. In fiscal
1999, we made sales of approximately 2,800 machines in this market, compared to
3,000 machines in fiscal 1998. The majority of our fiscal 1999 sales were to
gaming operations in France, Greece, Italy, Portugal, Slovenia, Spain, Sweden
and The Netherlands. We currently anticipate moderate growth in the European
installed base and our sales to this market will be principally dependent upon
replacement sales. Our market share improvement is due to our increased customer
awareness of product availability combined with service and training assistance.
South Africa
Our office in Midrand, Gauteng, South Africa services the gaming markets located
in South Africa, sub-Saharan Africa and the Indian Ocean Islands. Casino gaming
in South Africa is governed under the National Gambling Act, which has allocated
a total of 40 casino licenses among each of the 9 provinces in South Africa.
There are currently 18 operational casinos in the country, 9 casinos newly
opened under the National Gaming Act provisions and 9 existing casinos. The
National Gaming Act allows the 13 casinos, which were operating in South Africa
prior to the passage of the National Gambling Act, to continue to operate until
new licenses are granted. Four of these casinos closed during the year and
others are anticipated to close during the next few years as the majority of the
remaining new licenses will be issued.
All of the South African provinces are in various stages of implementing the
provisions of the National Gambling Act regarding casino licensing. Of the nine
newly operational casinos, three are in The Province of Mpumalanga, five are in
The Gauteng Province and one is in The KwaZulu Natal province. The Western Cape,
Eastern Cape and Northern Cape selected preferred candidates for licenses, but
have no operating casinos. The remaining provinces enacted gaming legislation
and established gaming boards. By the end of fiscal 1999, we were licensed as a
supplier/manufacturer in four of the nine provinces and have applications
pending in three other provinces. By early calendar year 2000, we will file the
application for Free State Province, leaving only one province that has not
requested applications from gaming product manufacturers.
During fiscal 1999, we sold 1,100 machines in the South Africa casino market,
compared to 1,600 units in fiscal 1998. We rank second in market share in this
region with 30% of unit sales. The majority of these sales were in the province
of Gauteng to two casino operators for installation in their permanent
facilities. We are pursuing additional sales of gaming machines and casino
systems to operators with existing licenses and potential operators who may be
awarded new licenses under the South African gaming legislation.
South Africa is also in the final stages of legalizing a limited payout market
("LPM"). The LPM permits smaller venues to operate a maximum of five machines,
with each machine limited to a maximum payout of 500 Rand or approximately $82.
These smaller venues which include bars, taverns, and social or sports clubs are
governed by the National Gambling Act and the provincial gambling acts. We
expect the first limited payout machines to begin operating between June and
September 2000. Before the LPM operations can begin, technical specifications
for machines and system monitoring requirements must be set into place by the
National Board. Licensing of LPM operators and site locations will be
accomplished by the individual provinces. We estimate the total size of this
market at 25,000 machines.
Japan
We service the Japanese market with two offices in Tokyo: IGT-Japan, established
in 1992; and Barcrest-Japan, acquired in 1998. We manufacture and sell pachisuro
machines under both names. The pachisuro machine is a three-reel slot machine
played with tokens and is considered a skill game as the player controls the
stopping of the reels. Payouts are relatively small. The product is regulated by
the Security Electronics and Communication Technological Agency ("SECTA"), which
ensures compliance with regulations mandated by the National Police Agency.
Pachisuro
Item 1. Business (continued)
machines are more fashion-driven and sell for approximately a third of the price
of our domestic S-Plus machine. These machines are licensed for three years,
however, they typically have a replacement cycle of less than 18 months.
The pachisuro installed base in the Japanese market is over 1,000,000 machines
in more than 17,000 halls and sites throughout the country. There are 22
manufacturers that are members of the Nichidenkyo ("NDK") manufacturer's
association and licensed to sell in this market. IGT-Japan became the first
foreign member of NDK in 1992 and a full member in 1995. Barcrest-Japan also
became a full member in 1995 and, now having completed its three year foreign
manufacturing requirement with NDK, may begin producing machines locally.
In Japan, we utilize third party manufacturers to produce our machines and
distributors to sell our products. The distributors sell to hall operators and
to second-tier distributors. IGT-Japan also has an in-house sales team to market
products directly to customers in Tokyo.
Over the past three years, IGT-Japan has experienced significant growth in sales
from 7,000 units in fiscal 1996 to 27,900 units in fiscal 1999. The relatively
short selling cycle of three to four months for any one new game release makes
success in this market highly dependent upon the ability to regularly introduce
popular new games.
Latin America
We sell casino-style gaming equipment to many legalized gaming jurisdictions in
Latin America through our established offices in Argentina, Brazil and Peru. In
addition, we utilize a distributor in Venezuela and our Miami office to service
various Latin American and Caribbean markets.
During fiscal 1999, IGT sold 3,900 machines in the Latin American market
including 1,200 units to a new Argentine casino, compared to 4,300 machines in
the previous year. Sales decreased due to new regulations and approval processes
in Brazil, and government delays in granting new operator licenses in Colombia.
We estimate the installed base of gaming machines in Latin America at
approximately 64,000 at the end of fiscal 1999.
In the last 18 months, multiple changes were made to the Brazilian regulations
governing electronic gaming machines in Bingo Halls. These changes affected
technical specifications and product accreditation. In September 1999, the
machine accreditation process was suspended for 30 days. On October 21, 1999,
the President of Brazil rescinded the law allowing electronic gaming machines in
Bingo Halls. See Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Gaming Operations
IGT's revenues and net income are significantly enhanced through growth in
wide-area progressive systems in the North American markets. We develop and
operate systems that link gaming machines, collectively referred to as
MegaJackpots, in various casinos in order to build jackpots which increase with
each wager made on that system. As of October 2, 1999, MegaJackpots were
operating in 16 domestic jurisdictions under the following systems: Dollars
Deluxe, Elvis, Fabulous Fifties, Five Deck Frenzy, Five Play Poker, High
Rollers, Jeopardy!, Megabucks, Nickelmania, Nickels, Nickels Deluxe, Party Time,
Pinball Mania, Pokermania, Quartermania, Quarters Deluxe, Slotopoly, Super
Megabucks, Totem Pole, Triple Play Poker, Wheel of Fortune, and Wheel of Gold.
Internationally, one MegaJackpot system, operated under the name Gullnaman in
Iceland, is supported by our IGT-Europe office.
Item 1. Business (continued)
The following table presents MegaJackpots information by jurisdiction:
October 2, 1999 September 30, 1998
Number of Number of Number of Number of
Jurisdiction Systems Machines Systems Machines
Nevada 19 6,200 15 6,200
New Jersey 21 3,100 16 2,600
Riverboat markets 55 2,700 36 2,100
Native American 26 2,300 15 1,800
Other domestic 15 600 7 700
International 1 200 3 500
--- ----- --- -----
137 15,100 92 13,900
=== ======= === ======
IGT continually provides innovation and enhanced player appeal to its
MegaJackpots games consistent with product lines that are sold directly to the
casinos. This is accomplished through the introduction of feature rich games
with second event bonusing incorporating popular themes, such as Elvis, Party
Time and video Wheel of Fortune which were introduced in fiscal 1999. New themed
product introductions planned for fiscal 2000 include video Jeopardy! and I
Dream of Jeannie, as well as a brand extension of Elvis.
We operate certain MegaJackpots systems under joint marketing alliances in order
to combine the game development efforts of other companies with our wide-area
progressive system expertise. Wheel of Fortune, which is offered through a joint
venture with Anchor, started in December 1996 in Nevada and New Jersey with
approximately 240 machines, and as of September 1999, 5,900 machines were
operating in 15 jurisdictions. Other developments with the Anchor joint venture
include Totem Pole and Wheel of Gold.
We also supply certain MegaJackpots games as "stand alone" games that are
proprietary in nature but not linked to a progressive system. These games are
leased on a per machine per day basis and are operated in Canada, Colorado,
Connecticut, Florida, Illinois, Indiana and Louisiana. Approximately 740
machines are operated as stand alone games. Most of these games were developed
in connection with the Anchor joint venture.
We recognize that all games, including MegaJackpot systems games, have a finite
life cycle. As a result, IGT systematically replaces, either wholly or in part,
older systems experiencing declining play levels with new systems incorporating
enhanced entertainment value and improved player appeal. This serves to increase
revenue generation overall as well as on a per unit basis for both IGT and our
customers. During fiscal 1999, IGT removed six MegaJackpot systems in four
jurisdictions.
The operation of linked progressive systems varies among jurisdictions as a
result of different gaming regulations. In all jurisdictions, the casinos
contribute a portion of the handle to fund the progressive jackpot. Funding of
the progressive jackpot differs by jurisdiction but is generally administered by
IGT. Many of our new product offerings are Instant Winner systems, which pay the
full jackpot amount in one sum when won rather than in annual payments.
Previously, unless a system was an Instant Winner, jackpots were paid out over
20 to 31 years in equal installments. With the passage of federal legislation in
October 1998, jackpot winners may now elect a single payment of the discounted
value of progressive jackpots in lieu of annual installments. In Atlantic City,
the progressive jackpot fund is administered by a trust managed by
representatives of the participating casinos. The trust pays IGT fees for annual
casino licensing and machine rental. In Colorado, funding of progressive
jackpots is administered by a separate fund managed by IGT. Progressive system
lease fees are paid to us from this fund. In Iowa, the progressive jackpot fund
is administered by a trust managed by IGT and any revenue or expense is
transferred from the trust to IGT.
Item 1. Business (continued)
In May 1999, legislation passed in Nevada which affected gaming manufacturers
who provide products to casino customers via revenue sharing arrangements and
wide-area progressive systems. The bill was passed by the legislature and signed
by the Governor in May 1999. It requires gaming manufacturers to pay their "full
proportionate share" of the Nevada gaming revenue tax and other annual device
fees on gaming machines by Nevada casinos. The bill also imposes additional
regulatory requirements on gaming manufacturers.
IGT also offers "leased" link progressive systems which link gaming machines
within a single casino or multiple casinos of common ownership. Currently, two
major hotel casinos operate leased link progressive systems with approximately
84 gaming machines linked on all such systems.
Internationally, we operate a progressive system for the University of Iceland
Lottery ("UIL"). IGT-Europe recently extended its agreement through fiscal 2000,
whereby we supply video gaming terminals ("VGT's") and a central system linking
the terminals. This system operates with 218 VLT's manufactured by IGT. In 1999,
we also negotiated non-progressive participation system agreements with UIL,
Italy and Norway.
Lease and Other Gaming Operations
IGT also receives gaming operations revenue from machines and systems on lease,
rental and other recurring revenue agreements. Lease revenue increased in fiscal
1999 due primarily to royalty revenue earned on our most popular game, Triple
Play Poker which is operational in various domestic jurisdictions. These
machines are placed under a royalty agreement whereby casinos pay IGT a monthly
royalty fee. IGT then pays Action Gaming, the developer of the game, a royalty
fee.
We currently lease machines to three state lotteries, Delaware, Oregon and Rhode
Island. We lease approximately 2,200 machines to the Oregon State Lottery under
a lease agreement expiring in April 2002. We also have machines on Rhode
Island's video lottery system which links two pari-mutuel facilities. As of
October 2, 1999, there were approximately 1,600 terminals operating on Rhode
Island's system. Upon completion of their expansion, IGT will have approximately
360 games on their system. Under a technology provider license with the Delaware
State Lottery, IGT leases approximately 1,900 video gaming machines to the state
at three pari-mutuel facilities. During the past year we added 590 games and
anticipate adding 450 games in 2000. Under the technology lease with the
Delaware Lottery which will expire in December 2001, we receive a percentage of
revenue for use and maintenance of these machines.
In 1999, we entered into a license agreement with the West Virginia Racing
Association ("WVRA"), for IGT's SAMS control system which will monitor
approximately 6,000 machines at the state's four pari-mutuel racing facilities.
The West Virginia Lottery will operate this system while IGT will provide
hardware and software maintenance. We also entered into a purchase agreement to
provide 2,000 gaming machines to the four pari-mutuel facilities of which over
1,100 machines were shipped during fiscal 1999. We expect to ship the remaining
units in the first half of fiscal 2000.
As part of our normal business, we also receive other recurring revenue in
various jurisdictions from short-term rental contracts or longer -term lease
contracts for gaming machines.
Sales and Service
Sales and Distribution
Our products and services are sold to gaming operators and government entities
which conduct gaming operations. During fiscal 1999, our ten largest domestic
customers accounted for 39% of our domestic gaming product sales. IGT markets
gaming products and proprietary systems through its internal sales staff, agents
and distributors. We employ more than 400 sales personnel in various domestic
and international locations.
Item 1. Business (continued)
IGT uses distributors for sales to specific markets including Louisiana, New
Jersey, New Mexico, New Zealand, a Canadian maritime province, the Caribbean,
France, Germany, Japan, Spain, The Netherlands and Venezuela. Sodak was our
exclusive distributor to Native American casinos until September 1999 when we
acquired Sodak. IGT's agreements with distributors do not specify minimum
purchases but generally provide that IGT may terminate the distribution
agreement if certain performance standards are not met.
Customer Service
IGT considers its customer service department an important aspect of the overall
marketing strategy and a key differentiating factor when casino operators
purchase equipment. We typically provide a 90-day service and parts warranty
domestically and up to a 180-day warranty internationally, for our gaming
machines. We currently employ more than 300 trained service personnel for
customer assistance and maintain service offices domestically in 11
jurisdictions and internationally in Argentina, Australia, Brazil, Japan, New
Zealand, Peru, South Africa, The Netherlands and the United Kingdom.
We also provide extensive customer education and service through training,
videotape instruction, a 24-hour customer service hotline, newsletters, our
website, www.IGTonline.com. and the Technical Assistance Center ("TAC"). The TAC
is a fully staffed facility providing 24-hour telephone support to all types of
casino system customers. The TAC has access to a range of field support
engineering resources to resolve technical issues. Through these extensive
resources, IGT provides a direct link for two-way communication between the
customer and IGT and access to product information 24-hours a day, seven days a
week.
Competition
The market for gaming machines and proprietary systems is intensely competitive.
Product Sales
US and foreign manufacturers which compete with IGT in the domestic casino-style
gaming machine market are Anchor, Aristocrat Leisure Limited ("Aristocrat"),
Bally, Atronics, Casino Data Systems ("CDS"), Sigma Game, Inc. ("Sigma"),
Silicon Gaming, Inc., Universal Distributing, Inc. and WMS Industries, Inc.
("WMS"). All have developed casino products and are either authorized to sell
products or are in the licensing process in many US gaming jurisdictions. There
are several competitors for the international markets including Aristocrat,
Atronic Casino Technology, Ltd ("Atronic"), a subsidiary of Atronic Casino
Technology Distribution GMBH, Aruze, formerly known as Universal, Cirsa Group
("Cirsa"), Franco Gaming, Ltd ("Franco"), a division of Recreativos Franco and
Novomatic Industries ("Novomatic").
In the accounting and player tracking systems product market, our IGS system
competes with products offered by Bally, CDS and several other system
manufacturers.
We consider ourselves one of five primary competitors in the linked gaming
market along with GTECH, Spielo, a supplier based in Canada, Anchor and WMS.
These suppliers have an established presence in the lottery market, substantial
resources and specialize in the development and marketing of gaming terminals to
governments. We continue to view the video lottery industry as an important
market for our products.
Gaming Operations
IGT's competitors in the progressive systems market are Bally, CDS and Silicon
Gaming, who combined operate four systems. We provide substantial marketing and
advertising support for our MegaJackpots systems products and compete on the
basis of our progressive systems brand names, product appeal, jackpot awards,
player loyalty and technical and marketing experience.
Item 1. Business (continued)
Manufacturing and Suppliers
We manufacture gaming machines in Australia, the United Kingdom, the US and
through a manufacturing relationship with a third party in Japan. The
manufacturing operations primarily involve the assembly of electronic
components, cables, harnesses, video monitors and prefabricated parts purchased
from outside sources. We also operate a cabinet manufacturing and silkscreen
facility in the US. IGT has a broad base of suppliers for its required material
and utilizes multi-sourcing practices to assure component availability. Domestic
manufacturing has been ISO 9002 certified since 1996. As part of our
restructuring plan for IGT-Australia, we expect to begin manufacturing the
IGT-Australia product lines in the Reno, Nevada facility in fiscal 2000.
IGT generally carries a significant amount of inventory due to the broad range
of products it manufactures and to facilitate its capacity to fill customer
orders on a timely basis. At October 30, 1999 and 1998, we had an estimated
$50.1 million and $77.7 million in backlog orders. This represents a normal
backlog and we reasonably expect to fill the October 30, 1999 backlog within
fiscal 2000.
Our research and development activities totaled $45.5 million, $38.1 million and
$31.1 million for the fiscal years 1999, 1998 and 1997. Research and development
activities for specific customers are charged to cost of product sales and
totaled $1.2 million, $0.9 million and $0.4 million for fiscal 1999, 1998 and
1997.
Patents, Copyrights and Trade Secrets
Our computer programs and technical know-how are our main trade secrets, and
management believes that they can best be protected by using technical devices
to protect the computer programs and by enforcing contracts with certain
employees and others with respect to the use of proprietary information, trade
secrets and covenants not to compete. We have obtained patents, trademarks and
copyrights with respect to various aspects of our games and other products,
including progressive systems and player tracking systems, and have patent
applications on file for protection of certain developments IGT has created. No
assurance can be given that the pending applications will be granted. These
patents range in subject matter from new game designs, including interactive
video games and new slot game techniques, as well as bonus and secondary game
features, gaming device components such as coin-handling apparatus, fiber-optic
light pens, coin-escalator mechanisms, optical door interlock, linked games,
gaming systems and a variety of other aspects of video and electronic slot
machines and associated equipment. There can be no assurance that the patents
will not be infringed or that others will not develop technology that does not
violate the patents.
IGT's intellectual property portfolio includes United States Patent No.
4,448,419, referred to as the Telnaes patent or the "virtual reel" patent. The
Telnaes patent expires in 2002. We believe that rights under the Telnaes patent
are important to the manufacture of spinning reel slot machines and the
expiration of the patent may increase competition in the market for spinning
reel machines and progressive systems. However, most of our competitors
currently hold licenses of various forms under this patent including Bally, CDS,
Sigma, and Universal Distributing.
Employees
As of October 2, 1999, IGT, including all subsidiaries, employed approximately
3,300 persons, including 588 in administrative positions, 460 in sales and 643
in engineering. Of the total employees, our North American operation accounted
for 2,276; IGT-Australia, 457; IGT-UK, 427; and approximately 140 employees at
other subsidiaries. The total number of employees decreased in fiscal 1999 by
approximately 100 as compared with the number of employees at September 30,
1998.
Item 1. Business (continued)
Government Regulation
Various gaming regulatory agencies have issued licenses allowing the Company to
manufacture and/or distribute its products and operate wide-area progressive
systems. Laws of the various gaming regulatory agencies generally serve to
protect the public and ensure that gaming related activity is conducted
honestly, competitively, and free of corruption. We have never been denied a
gaming related license, nor have our licenses been suspended or revoked. No
assurances can be made, however, that licenses will be given or renewed in the
future.
Although the gaming laws vary from jurisdiction to jurisdiction, typically, the
regulatory requirements are either less restrictive or involve similar
restrictions to those in Nevada, as discussed below.
Nevada Regulation
The manufacture, sale and distribution of gaming devices in Nevada are subject
to extensive state laws, regulations of the Nevada Gaming Commission (the
"Nevada Commission") and State Gaming Control Board (the "Control Board"), and
various county and municipal ordinances. These laws, regulations and ordinances
primarily concern the responsibility, financial stability and character of
gaming equipment manufacturers, distributors and operators, as well as persons
financially interested or involved in gaming operations. The manufacture,
distribution and operation of gaming devices require separate licenses. The
laws, regulations and supervisory procedures of the Nevada Commission seek to
(i) prevent unsavory or unsuitable persons from having a direct or indirect
involvement with gaming at any time or in any capacity, (ii) establish and
maintain responsible accounting practices and procedures, (iii) maintain
effective control over the financial practices of licensees, including
establishing minimum procedures for internal fiscal affairs and the safeguarding
of assets and revenues, providing reliable record keeping and requiring the
filing of periodic reports with the Nevada Commission, (iv) prevent cheating and
fraudulent practices, and (v) provide a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on our operations.
A Nevada gaming licensee is subject to numerous restrictions. Licenses must be
renewed periodically and licensing authorities have broad discretion with regard
to such renewals. Licenses are not transferable. Each type of machine sold by us
in Nevada must first be approved by the Nevada Commission, which may require
subsequent machine modification. Substantially all material loans, leases, sales
of securities and similar financing transactions must be reported to or approved
by the Nevada Commission. Changes in legislation or in judicial or regulatory
interpretations could occur which could adversely affect the Company.
A publicly traded corporation must be registered and found suitable to hold an
interest in a corporate subsidiary which holds a gaming license. International
Game Technology has been registered by the Nevada Commission as a publicly
traded holding company and was permitted to acquire IGT as its wholly-owned
subsidiary. As a registered holding company, it is required periodically to
submit detailed financial and operating reports to such Commission and furnish
any other information which the Commission may require. No person may become a
stockholder of, or receive any percentage of profits from, a licensed subsidiary
without first obtaining licenses and approvals from the Nevada Commission.
Officers, directors and key employees of a licensed subsidiary and of the
Company who are actively engaged in the administration or supervision of gaming
must be found suitable.
No proceeds from any public sale of securities of a registered holding
corporation may be used for gaming operations in Nevada or to acquire a gaming
property without the prior approval of the Nevada Commission. The Company
believes it has all required licenses to carry on its business in Nevada.
Item 1. Business (continued)
Officers, directors, and certain key employees of IGT who are actively and
directly involved in gaming activities of the Company's licensed gaming
subsidiary may be required to be licensed or found suitable. Officers,
directors, and certain key employees of the Company's licensed gaming subsidiary
must file applications with the Nevada Commission and may be required to be
licensed or found suitable. Employees associated with gaming must obtain work
permits which are subject to immediate suspension under certain circumstances.
In addition, anyone having a material relationship or involvement with the
Company may be required to be found suitable or licensed, in which case those
persons would be required to pay the costs and fees of the Control Board in
connection with the investigation. An application for licensure or finding of
suitability may be denied for any cause deemed reasonable by the Nevada
Commission. A finding of suitability is comparable to licensing and both require
submission of detailed personal and financial information followed by a thorough
investigation. Changes in licensed positions must be reported to the Nevada
Commission. In addition to its authority to deny an application for a license or
finding of suitability, the Nevada Commission has jurisdiction to disapprove a
change in position by such officer, director, or key employee.
The Nevada Commission has the power to require the Company and its licensed
gaming subsidiary to suspend or dismiss officers, directors or other key
employees and to sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to act in such
capacities. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and its licensed gaming subsidiary are required to submit detailed
financial and operating reports to the Nevada Commission. If it were determined
that gaming laws were violated by a licensee, the gaming licenses it holds could
be limited, conditioned, suspended or revoked subject to compliance with certain
statutory and regulatory procedures. In addition to the licensee, the Company
and the persons involved could be subject to substantial fines for each separate
violation of the gaming laws at the discretion of the Nevada Commission. In
addition, a supervisor could be appointed by the Nevada Commission to operate
the Company's gaming property and, under certain circumstances, earnings
generated during the supervisor's appointment could be forfeited to the State of
Nevada. The limitation, conditioning or suspension of any gaming license or the
appointment of a supervisor could (and revocation of the gaming license would)
materially and adversely affect the Company's operations.
The Nevada Commission may also require any beneficial holder of our voting
securities, regardless of the number of shares owned, to file an application, be
investigated, and be found suitable, in which case the applicant would be
required to pay the costs and fees of the Control Board investigation. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership, or trust, it must submit detailed business and
financial information including a list of beneficial owners. Any person who
acquires 5% or more of the Company's voting securities must report the
acquisition to the Nevada Commission; any person who becomes a beneficial owner
of 10% or more of our voting securities must apply for a finding of suitability
within 30 days after the Chairman of the Control Board mails the written notice
requiring such finding.
Under certain circumstances, an Institutional Investor, as such term is defined
in the Nevada Regulations, which acquires more than 10%, but not more than 15%,
of the Company's voting securities may apply to the Nevada Commission for a
waiver of such finding of suitability requirements, provided the institutional
investor holds the voting securities for investment purposes only. An
institutional investor will not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
board of directors of IGT, any change in its corporate charter, bylaws,
management, policies or operations of IGT, or any of its gaming affiliates, or
any other action which the Nevada Commission finds to be inconsistent with
holding the Company's voting securities for investment purposes only. Activities
which are not deemed to be inconsistent with holding voting securities for
investment purposes only include: (i) voting on all matters voted on by
stockholders; (ii) making financial and other inquiries of management of the
type normally made by securities analysts for informational purposes and not to
cause a change in its management, policies or operations; and (iii) such other
activities as the Nevada Commission may determine to be consistent with such
investment intent.
Item 1. Business (continued)
The Nevada Commission has the power to investigate any debt or equity security
holder of the Company. The Clark County Liquor and Gaming Licensing Board, which
has jurisdiction over gaming in the Las Vegas area, may similarly require a
finding of suitability for a security holder. The applicant stockholder is
required to pay all costs of such investigation. Our bylaws of the Company
provide for the Company to pay such costs as to its officers, directors or
employees.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
Chairman of the Control Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock beyond such period
of time as may be prescribed by the Nevada Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action, and possible
loss of our approvals, if, after it receives notice that a person is unsuitable
to be a stockholder or to have any other relationship with, the Company (i) pay
that person any dividend or interest upon voting securities of the Company, (ii)
allow that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) give remuneration in any
form to that person, for services rendered or otherwise, or (iv) fail to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities for cash at fair market value. Additionally the Clark County
authorities have taken the position that they have the authority to approve all
persons owning or controlling the stock of any corporation controlling a gaming
license.
The Nevada Commission may, in its discretion, require the holder of any debt
security of the Company to file applications, be investigated and be found
suitable to own the debt security of the Company. If the Nevada Commission
determines that a person is unsuitable to own such security, then pursuant to
the Nevada Gaming Control Act (the "Nevada Act"), the Company can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Commission at any time. If any securities are held in
trust by an agent or by a nominee, the record holder may be required to disclose
the identity of the beneficial owner to the Nevada Commission. A failure to make
such disclosure may be grounds for finding the record holder unsuitable. The
Company is also required to render maximum assistance in determining the
identity of the beneficial owner. The Nevada Commission has the power at any
time to require the Company's stock certificates to bear a legend indicating
that the securities are subject to the Nevada Act and the regulations of the
Nevada Commission. To date, the Nevada Commission has not imposed such a
requirement.
The Company may not make a public offering of its securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in
Nevada, or retire or extend obligations incurred for such purposes. Such
approval, if given, does not constitute a finding, recommendation, or approval
by the Nevada Commission or the Control Board to the accuracy or adequacy of the
prospectus or investment merits of the securities. Any representation to the
contrary is unlawful. Changes in control of the Company through merger,
consolidation, acquisition of assets or stock, management or consulting
agreements or any form of takeover cannot occur without the prior investigation
of the Control Board and approval of the Nevada Commission. Entities seeking to
acquire control of the Company must satisfy the Control Board and Nevada
Commission in a variety of stringent standards prior to assuming control of the
Company. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
Item 1. Business (continued)
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and other corporate defense tactics
that affect corporate gaming licensees in Nevada, and corporations whose stock
is publicly traded that are affiliated with those operations, may be injurious
to stable and productive corporate gaming. The Nevada Commission has established
a regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's policy
to (i) assure the financial stability of corporate gaming operators and their
affiliates; (ii) preserve the beneficial aspects of conducting business in the
corporate form; and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before the Company can make exceptional
repurchases of voting securities above the current market price thereof and
before a corporate acquisition opposed by management can be consummated.
Nevada's gaming laws and regulations also require prior approval by the Nevada
Commission if the Company were to adopt a plan of recapitalization proposed by
our Board of Directors in opposition to a tender offer made directly to its
stockholders for the purpose of acquiring control of the Company.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Control Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Control Board of the licensee's participation in foreign gaming.
The revolving fund is subject to increase or decrease at the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. A licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the grounds of personal unsuitability.
Federal Registration
The Federal Gambling Devices Act of 1962 ("the Act") requires manufacturers to
comply with gambling device identification and record keeping requirements and
prohibits any person from transporting gambling devices, unless that person
first registers with the US Department of Justice. The Company complies with the
requirements of the Act and maintains its annual registration with the US
Department of Justice.
Native American Gaming Regulation
The Company manufactures and supplies gaming equipment to gaming operations
located on Native American tribal lands. Gaming on Native American lands is
governed by the Indian Gaming Regulatory Act of 1988 ("IGRA"), Tribal-State
compacts and Tribal gaming regulations. Tribal-State compacts vary from
state-to-state and in many cases require equipment manufacturers and/or
distributors to meet ongoing registration and licensing requirements. In
addition, Tribal gaming commissions have been established by many Native
American tribes to regulate gaming related activity on Indian lands.
Item 2. Properties
Square Owned/
Location Footage Leased Use
- --------------------------------------------------------------------------------
Reno, Nevada 1,000,000 Owned Manufacturing,warehousing, sales,
administration
Sydney, Australia 188,000 Leased Manufacturing, warehousing, sales,
administration
Ashton, UK 122,300 Owned Manufacturing
Ashton, UK 17,200 Leased Manufacturing
Las Vegas, Nevada 140,000 Leased Warehousing, sales, administration
Rapid City, South Dakota 94,000 Owned Warehousing, sales, administration
Wellington, New Zealand 12,000 Owned Warehousing, sales, administration
Other domestic 139,000 Leased Sales and administration
Other international 196,600 Leased Warehousing, sales, administration
IGT also leases two buildings in Reno, Nevada consisting of approximately
179,000 square feet. The lease on these facilities expires in 2003. IGT vacated
these buildings in 1996 and 1997 upon completion of its South Meadows facility
and subleases 91,500 square feet to third parties. Sublessors are being sought
for the remaining space.
Item 3. Legal Proceedings
IGT has been named in and has brought lawsuits in the normal course of business.
Management does not expect the outcome of these suits to have a material adverse
effect on our financial position or results of future operations. For a
description of certain of these matters, see Note 13 of Notes to Consolidated
Financial Statements, which is incorporated by reference in response to this
item.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
Our common stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "IGT." The following table sets forth for the periods presented the high
and low sales prices of the common stock as traded on the NYSE:
Fiscal 1999 High Low
First Quarter $ 24 1/2 $ 16 1/2
Second Quarter 23 7/16 14 3/8
Third Quarter 19 1/2 14 11/16
Fourth Quarter 19 1/4 16 3/16
Fiscal 1998 High Low
First Quarter $ 26 13/16 $ 21 7/8
Second Quarter 26 3/16 23 3/16
Third Quarter 28 9/16 23 5/8
Fourth Quarter 28 7/8 18 1/2
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters, (continued)
As of November 26, 1999, there were approximately 4,631 record holders of IGT's
common stock. The closing price of the common stock was $18 3/16 on that date.
We declared one quarterly dividend of $0.03 per share in fiscal 1999 and four
quarterly dividends of $0.03 per share in fiscal 1998. During fiscal 1999, IGT's
Board of Directors voted to discontinue payment of cash dividends and redirect
the funds toward the stock repurchase plan or other corporate purposes.
IGT's transfer agent and registrar is The Bank of New York , P.O. Box 11258,
Church Street Station, New York, NY 10286, (800) 524-4458.
Item 6. Selected Financial Data
The following information has been derived from our consolidated financial
statements for the years ended:
October 2, September 30,
-------------------------------------------
1999 1998 1997 1996 1995
(Amounts in thousands,
except per share data)
Selected Income Statement Data
Total revenues $ 929,662 $ 824,123 $ 743,970 $ 733,452 $620,786
Income from operations $ 116,318 $ 218,877 $ 191,437 $ 169,833 $139,341
Income before extraordinary item $ 65,312 $ 152,446 $ 137,247 $ 118,017 $ 92,648
Net income $ 62,058 $ 152,446 $ 137,247 $ 118,017 $ 92,648
Basic earnings per share
Income before extraordinary item $ 0.65 $ 1.35 $ 1.14 $ 0.93 $ 0.71
Net income $ 0.62 $ 1.35 $ 1.14 $ 0.93 $ 0.71
Diluted earnings per share
Income before extraordinary item $ 0.65 $ 1.33 $ 1.13 $ 0.93 $ 0.71
Net income $ 0.62 $ 1.33 $ 1.13 $ 0.93 $ 0.71
Cash dividends declared per common
share $ 0.03 $ 0.12 $ 0.12 $ 0.12 $ 0.12
Weighted average common shares
outstanding 99,461 113,064 120,715 126,555 130,198
Weighted average common and potential
shares outstanding 100,238 114,703 121,829 127,412 131,094
Selected Balance Sheet Data
Working capital $ 762,684 $ 470,003 $ 406,958 $ 488,150 $508,917
Total assets $1,765,060 $1,543,628 $1,215,052 $1,154,187 $971,698
Long-term notes payable and capital
lease obligations $ 990,436 $ 322,510 $ 140,713 $ 107,155 $107,543
Stockholders' equity $ 242,218 $ 541,276 $ 519,847 $ 623,200 $554,090
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
We operate principally in two lines of business: the development, manufacturing,
marketing and distribution of gaming products (gaming product sales); and the
development, marketing and operation of proprietary wide-area progressive
systems and gaming equipment leasing (gaming operations).
Fiscal 1999 Compared to Fiscal 1998
Fiscal 1999 net income of $62.1 million or $0.62 per diluted share included
certain one-time charges recorded in the fourth quarter totaling $98.1 million
($70.4 million or $0.70 per diluted share, net of tax effects) as discussed
below. An extraordinary loss on early redemption of debt of $3.3 million or
$0.03 per diluted share was also recognized during fiscal 1999. Net income for
the year ended October 2, 1999 before the one-time charges and extraordinary
loss totaled $135.7 million or $1.35 per diluted share versus net income of
$152.4 million or $1.33 per diluted share in fiscal 1998.
The one-time charges of $98.1 million consist primarily of the write-off of
intangible assets of $86.8 million related to IGT-Australia's prior acquisition
of Olympic Amusements. (See Note 7 to Notes to Consolidated Financial
Statements.) In an effort to return IGT-Australia to a profitable operation, we
are currently in the process of a significant restructuring which includes
narrowing current product lines and utilizing IGT's Reno, Nevada manufacturing
plant to reduce product costs. We recorded restructuring costs of $6.0 million
in fiscal 1999 related to this plan, including a $4.0 million inventory
obsolescence charge and $2.0 million in asset and facility redundancy costs. We
estimate an additional $2.5 million in costs will be incurred during fiscal
2000, resulting from redundancy in our sales, engineering, manufacturing and
support departments. We also recorded impairment charges of $5.3 million in
fiscal 1999, relating to changes in our recoverability assessment of inventory
and receivables in Brazil. The government in Brazil recently rescinded the law
allowing gaming devices in bingo halls throughout this market.
Revenues and Cost of Sales
Fiscal 1999 revenues of $929.7 million improved 13% over fiscal 1998 revenues of
$824.1 million. This improvement resulted from a 21% increase in product sales
revenue as well as a 2% increase in gaming operations revenue.
We shipped 116,000 gaming machines for total product sales revenues of $576.6
million in fiscal 1999 compared to 77,000 units for $477.0 million in the prior
fiscal year. Domestic shipments totaled 41,100 units for the year ended October
2, 1999 compared to 37,800 units in the year earlier period. The four major new
casino openings in the Las Vegas, Nevada market as well as growth in the
Canadian and Native American markets, positively impacted domestic product sales
during 1999. Current year shipments to new Las Vegas properties included Park
Place's Paris Resort, The Resort at Summerlin, Circus Circus' new Mandalay Bay
and the Venetian Resort. Also contributing to the current year improvement were
shipments of 3,000 machines to the Ontario Lottery Commission and 1,800 machines
to the new MGM and Circus Circus casinos in Detroit, Michigan. Domestic revenues
for the current fiscal period also benefited from increased demand in the Native
American market. In June 1999, we became a licensed manufacturer for Native
American venues in Washington. Current year sales included 1,500 games for a
market share of approximately 93% to a Washington licensee who designs and
markets gaming machines for placement in eight Native American casinos.
International shipments of 74,900 machines accounted for 65% of total units, the
highest percentage in our history, compared to 39,200 machines in fiscal 1998.
This 91% growth in international unit shipments was driven primarily by Japan
and Barcrest which contributed increased shipments of approximately 18,400 units
each. Growth in Japanese pachisuro sales were driven by the introduction of
popular game themes including Popper King, Dynamite and Elvis. Current year
shipments for Barcrest, which was acquired in March 1998, include a full year of
results. Machine shipments in the Australia market totaled 6,700 units in fiscal
1999 compared to 6,200 machines last year. The lack of anticipated growth in the
current year unit sales as a result of the Olympic acquisition influenced our
assessment of the IGT-Australia intangible asset impairment.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
The gross margin on product sales was 37% in the current year period compared to
41% in fiscal 1998. This fluctuation is the result of an increase in the mix of
new domestic product lines, including Game King and Vision, which have lower
gross margin percentages yet higher gross margin dollars along with increased
obsolescence expense domestically. The gross margin was also impacted by the
higher percentage of international sales during 1999 which are typically at
lower gross margins.
Gaming operations revenue for the year ended October 2, 1999 totaled $353.1
million compared to $347.1 million in fiscal 1998. This growth primarily
resulted from joint venture activities. The total installed base of gaming
machines operating on our MegaJackpot systems at October 2, 1999 increased to
15,100 games on 137 systems from 13,900 machines on 92 systems at the end of
fiscal 1998. Joint venture games including Wheel of Fortune contributed $78.3
million to total gaming operations revenues. During the year we began operating
MegaJackpot systems in two new jurisdictions, Iowa and Michigan. We introduced
36 new systems in nine jurisdictions during the year including Slotopoly, Elvis,
Party Time and Triple Play Poker in MegaJackpots format in Atlantic City. The
introduction of these new systems in various jurisdictions offset the decrease
in revenue of other maturing systems. We continue to pursue additional markets,
domestically and internationally, for linked progressive games.
The gross margin on gaming operations revenues was 60% compared to 54% in the
prior fiscal year. This improvement was due primarily to profits from joint
venture activities which, for accounting purposes, are reported net of expenses
in gaming operations revenues. Additionally, higher average interest rates
lowered the cost of funding jackpot payments.
Expenses
Fiscal 1999 operating expenses totaled $813.3 million including the $98.1
million impairment of assets and restructuring charges. Operating expenses
before the one-time charges discussed above as a percent of total revenue were
22% in fiscal 1999 compared to 20% in fiscal 1998. The $23.3 million increase in
selling, general and administrative expenses reflects the inclusion of operating
expenses attributable to the businesses acquired in the UK and Australia in
March 1998, along with increased wages, professional services and domestic
advertising, marketing, and compliance expenses related to new product
offerings.
Depreciation and amortization expenses totaled $24.0 million in the current year
compared to $18.6 million in fiscal 1998. This increase was primarily due to
amortization of goodwill and additional depreciation of the acquired assets.
Research and development expenses increased $7.4 million compared to the prior
year due to the inclusion of a full year of Barcrest UK and Olympic operations
along with higher engineering expenditures domestically related to the
development of over 30 new games. Bad debt expense increased $3.4 million over
fiscal 1998 due to growth in product sales as well as additional reserves for
gaming operations activities.
Other Income and Expense
Other expense, net for the current year totaled $14.9 million and was impacted
by interest expense of $31.2 million on the $1.0 billion senior notes issued in
May 1999. Other income, net for the comparable prior year period totaled $15.7
million which included a gain on the sale of the IGT-Australia manufacturing
facility of $10.4 million. Operation of our MegaJackpot systems results in
interest income from both the investment of cash and from investments purchased
to fund jackpot payments. Interest expense on the jackpot liability is accrued
at the rate earned on the investments purchased to fund the liability.
Therefore, interest income and expense relating to funding jackpot winners are
similar and increase at approximately the same rate based on the growth in total
jackpot winners.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Business Segments Operating Profit (See Note 19 of Notes to Consolidated
Financial Statements) Manufacturing and gaming operations operating profit
reflects an allocation of selling, general, administrative and engineering
expenses to each of these business segments.
Manufacturing operating loss was $46.9 million for the year ended October 2,
1999 including the one-time charges for impairment and restructuring of $98.1
million. Manufacturing operating profit before these charges totaled $50.8
million compared to $81.0 million in the prior period. This fluctuation resulted
from a decline in the gross margin to 37% from 41% in the prior year as well as
increased domestic advertising, marketing and compliance expenses, increased
selling expenses in Japan and the inclusion of a full year of operating expenses
from Barcrest and Olympic. Fiscal 1999 gaming operations operating profit
increased $13.1 million or 8% compared to the prior year period. This
improvement resulted primarily from the continued popularity of Wheel of Fortune
and higher average interest rates which resulted in lower costs of funding
jackpot payments.
Fiscal 1998 Compared to Fiscal 1997
Net income for the year ended September 30, 1998 totaled $152.4 million or $1.33
per diluted share compared to $137.2 million or $1.13 per diluted share for
fiscal 1997. Continued growth in proprietary systems revenue and increased
international product sales, primarily due to acquisitions, were the most
significant contributors to the 11% improvement in net income over the prior
year period.
Revenues and Cost of Sales
Fiscal 1998 revenues of $824.1 million improved 11% over fiscal 1997 revenues of
$744.0 million. This improvement resulted from a 23% increase in gaming
operations revenues as well as a small increase in product sales.
We shipped 77,000 gaming machines for total product sales revenues of $477.0
million in fiscal 1998 compared to 79,300 units for $461.2 million in the prior
fiscal year. Domestic revenues were influenced by a shift in demand to IGT's
newer, more advanced product lines such as the Game King, S-Plus Limited and
Vision machines. Due to the advanced features and components of these products,
they carry a higher average price per unit. The percentage of new product lines
increased to 43% of total domestic units sold for fiscal 1998, compared to 10%
in the prior year, resulting in higher average revenue per unit overall.
Domestic shipments totaled 37,800 units for the year ended September 30, 1998
compared to 54,000 units in the year earlier period. We maintained our market
share in domestic markets where fewer new casino openings and expansions slowed
growth in fiscal 1998. Fiscal 1998 domestic shipments included 5,900 units to
Sodak, IGT's distributor to Native American markets, and 2,100 machines shipped
to Bellagio, Mirage Resorts' newest luxury resort in Las Vegas.
International unit shipments of 39,200 accounted for 51% of total units compared
to 25,300 in fiscal 1997. International unit shipments improved 55% due
primarily to acquisitions along with improved sales in South Africa and Latin
America. Barcrest, IGT's subsidiary in the U.K., sold 13,100 units since its
acquisition by IGT in March 1998. Machine shipments to Argentina and other Latin
America markets increased to 4,300 units in the current year, 1,000 more than in
fiscal 1997. IGT sold 1,600 units in the South African market including sales to
newly licensed casinos in the Gauteng province. Shipments to other international
jurisdictions including Europe, Japan and Asia remained consistent or increased
slightly year over year. Machine shipments in the Australia market totaled 6,200
units in fiscal 1998, including 2,000 Olympic machines, compared to 7,700 units
in fiscal 1997.
The gross margin on product sales was 41% in the current year period compared to
44% in fiscal 1997. This fluctuation is the result of an increase in the mix of
new product lines, including Game King, S-Plus Limited and Vision, which have
lower gross margin percentages yet higher gross margin dollars. The gross margin
was also impacted by the higher percentage of international sales during 1998
which are typically at lower gross margins.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Gaming operations revenue totaled $347.1 million in fiscal 1998 and $282.8
million in fiscal 1997. This 23% increase was the result of continued popularity
of Wheel of Fortune, strong play on Nevada Megabucks and the introduction of new
systems. The total installed base of gaming machines operating on IGT's
MegaJackpot systems at September 30, 1998 increased to 13,900 games on 92
systems from 11,700 machines on 67 systems at the end of fiscal 1997. Joint
venture games including Wheel of Fortune contributed $65.2 million to total
gaming operations revenues. Joint venture results are reported net of expenses
in gaming operations revenue. The Nevada Megabucks jackpot attained record
levels in 1998 contributing to the year over year improvement in gaming
operations revenues. IGT introduced 15 new systems in 11 jurisdictions during
the year including Slotopoly in Nevada and Jeopardy! in six jurisdictions. The
current year also benefited from a full year of operation of MegaJackpots in
Missouri where linked progressive systems were introduced in June 1997.
The gross margin on gaming operations revenues was 54% compared to 49% in the
prior fiscal year. This improvement was due primarily to profits from joint
venture activities which, for accounting purposes, are reported net of expenses
in gaming operations revenues. However, declining interest rates for the year
resulted in higher costs for the interest-sensitive assets which we purchase to
fund jackpot payments.
Expenses
Operating expenses as a percent of total revenue were 20% in both fiscal 1998
and 1997. The $7.6 million increase in selling, general and administrative
expenses reflects the additional operating expenses of Barcrest and Olympic.
Domestic selling, general and administrative expenses remained consistent with
the prior year. Depreciation and amortization expenses totaled $18.6 million in
the current year compared to $11.8 million in fiscal 1997. This increase
reflects the amortization of the excess of the purchase price over the net
assets acquired in the Barcrest and Olympic acquisitions as well as additional
depreciation on the acquired assets.
Research and development expenses increased $7.0 million relative to the prior
year. The additional research and development centers in the U.K. and Australia,
along with our commitment to new product development domestically, contributed
to a 50% increase in research and development personnel from the prior year. Bad
debt expense declined relative to the prior year as we aligned the receivable
reserve with favorable collection experience.
Other Income and Expense
Other income and expense decreased $5.5 million to $15.7 million for the year
compared to $21.2 million for the prior year. This decrease is primarily due to
increased interest costs of $5.2 million on the corporate and Australian lines
of credit due to borrowings related to the acquisitions of Barcrest and Olympic
and treasury stock purchases. Operation of our MegaJackpot systems results in
interest income from both the investment of systems cash and from investments
purchased to fund jackpot payments. Interest expense on the jackpot liability is
accrued at the rate earned on the investments purchased to fund the liability.
Therefore, interest income and expense relating to funding jackpot winners are
equal and increase at the same rate based on the growth in total jackpot
winners. Interest income from investment of systems cash increased $2.4 million
over fiscal 1997 as a result of growth in proprietary systems.
We sold our Australian manufacturing and office facility at a gain of
approximately $10.4 million during the year. The Company leases back
approximately one third of the facility for its Australian operations. The gain
on the sale of assets in the prior period related to sales of investment
securities.
Business Segments Operating Profit (See Note 19 of Notes to Consolidated
Financial Statements) Manufacturing and gaming operations operating profit
reflects an allocation of selling, general, administrative and engineering
expenses to each of these business segments.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Manufacturing operating profit was $81.0 million for the year ended September
30, 1998 compared to $105.6 million in the prior period. This fluctuation
resulted from a 3% decline in product sales gross margin due to lower unit sales
volume and an increase in the sales of new product lines that have a lower gross
margin. A higher percentage of international sales, which typically have lower
gross margins, also impacted operating profit for the manufacturing segment.
Fiscal 1998 gaming operations operating profit increased $54.1 million or 46%
compared to the prior year period. This improvement resulted primarily from the
continued popularity of Wheel of Fortune and strong play on Nevada Megabucks.
Higher costs of interest-sensitive assets purchased to fund jackpot payments
partially offset the overall increase.
Foreign Operations
Approximately 45% of our total product sales in fiscal 1999 and 39% in fiscal
1998 were derived outside of North America. To date, we have not experienced
significant translation or transaction losses related to foreign exchange
fluctuations.
Financial Condition, Liquidity and Capital Resources
We believe that existing cash balances, short-term investments and available
borrowing capacity together with funds generated from operations will be
sufficient to meet operating requirements for the next twelve months. IGT's
unrestricted cash and short-term investments are available for strategic
investments, mergers and acquisitions, as well as to fund our stock repurchase
program.
Working Capital
Working capital increased $292.7 million to $762.7 million since the prior year
end due primarily to excess proceeds from the $1.0 billion Senior Notes issued
in May 1999. Investments to fund liabilities to jackpot winners and the
corresponding jackpot liabilities decreased due to payments to prior jackpot
winners who elected a discounted single cash payment in lieu of annual
installments. Additional changes in current assets contributed to the overall
fluctuation in working capital including an increase in accounts receivable,
offset by inventory reductions. Both were the result of sales volumes. Changes
in current liabilities included a decrease in current maturities of long-term
debt resulting from the repayment of outstanding debt with proceeds from the
$1.0 billion Senior Notes issued in May 1999. The decrease in current maturities
of long-term debt was partially offset by increases in other current
liabilities, including accrued income taxes and accrued interest on new
borrowings.
Cash Flows
IGT's cash and cash equivalents totaled $426.3 million at October 2, 1999, a
$250.9 million increase from the prior fiscal year end. Cash provided by
operating activities totaled $261.4 million in fiscal 1999, $107.1 million in
fiscal 1998 and $118.1 million in fiscal 1997. During these periods,
fluctuations in receivables and inventories were influenced by sales volumes and
timing and resulted in the most significant changes in cash flows from operating
activities.
Our proprietary systems provide cash through collections from systems to fund
jackpot liabilities and from maturities of US government securities purchased to
fund jackpot liabilities. Cash is used to make payments to jackpot winners or to
purchase investments to fund liabilities to jackpot winners. These activities
used cash of $21.3 million in the current year. The net cash provided for fiscal
1998 was $36.3 million and $28.2 million for fiscal 1997.
Fiscal 1999 cash flows from operating activities increased due to the
realization of deferred tax assets related to the timing of the tax
deductibility of jackpot payments. Federal legislation was passed in October
1998 which allows jackpot winners to receive the discounted value of progressive
jackpots won in lieu of annual installments.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
The primary use of investing cash in the current year related to the acquisition
of businesses (see Note 2 to Notes to Consolidated Financial Statements.) Uses
of cash from investing activities also included purchases of property, plant and
equipment totaling $17.8 million in fiscal 1999, $16.8 million in fiscal 1998
and $33.1 million in fiscal 1997. Capital expenditures in fiscal 1997 related
primarily to the construction of our manufacturing and administrative facilities
in Reno, Nevada.
The primary use of financing cash in the current year related to treasury stock
purchases of $361.4 million. Purchases of treasury stock were $122.2 million in
fiscal 1998 and $225.5 million in fiscal 1997. Proceeds from additional
borrowings of $622.8 million, net of repayments on outstanding lines of credit
and Senior Notes redeemed, were used primarily to fund stock repurchases and
working capital. Net borrowings in the prior year period were used primarily to
acquire businesses and purchase treasury shares.
Stock Repurchase Plan
A stock repurchase plan was originally authorized by our Board of Directors in
October 1990. As of November 30, 1999, IGT could purchase an additional 25.1
million shares under the authorization as modified by the Board of Directors.
During fiscal 1999, we repurchased 21.8 million shares for an aggregate purchase
price of $361.4 million. During fiscal 1998, we repurchased 5.5 million shares
for an aggregate purchase price of $122.2 million. During the period of October
3, 1999 through November 30, 1999, we purchased 1.4 million shares for an
aggregate purchase price of $26.7 million.
Recently Issued Accounting Standards
On June 30, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for the first quarter of our fiscal year ending September 29, 2001. We
believe that adoption of this statement will not have a material impact on our
financial condition or results of operations.
Reclassifications
Certain amounts in the 1998 and 1997 consolidated financial statements have been
reclassified to be consistent with the presentation used in fiscal year 1999.
Lines of Credit
Our domestic and foreign borrowing facilities totaled $276.3 million at October
2, 1999. Of this amount, $3.3 million was drawn, $3.2 million was reserved for
letters of credit and the remaining $269.8 million was available. We are
required to comply with certain covenants contained in these agreements which,
among other things, limit financial commitments we may make without the written
consent of the lenders and require the maintenance of certain financial ratios.
At October 2, 1999, we were in compliance with all applicable covenants.
In May 1999, IGT completed the private placement of $1.0 billion in aggregate
principal amount of Senior Notes pursuant to rule 144A under the Securities Act
of 1933. The Senior Notes were issued in two tranches: $400 million aggregate
principal amount of 7.875% Senior Notes, due May 15, 2004, priced at 99.053% and
$600 million aggregate principal amount of 8.375% Senior Notes, due May 15,
2009, priced at 98.974%. In August 1999, we exchanged all outstanding 7.875%
Senior Notes due 2004 and all outstanding 8.375% Senior Notes due 2009 for
identical registered notes. A portion of the proceeds was used to redeem
previously outstanding 7.84% Senior Notes due 2004. This resulted in a
prepayment penalty of $3.3 million after tax, and is reflected in the income
statement as an extraordinary expense. Additionally, we repaid outstanding
borrowings under both our US revolving bank credit facility and our Australian
credit facility and settled a forward equity share repurchase of 4.9 million
shares of our common stock. The remaining net proceeds from the offering were
used to finance our acquisition of Sodak and to fund working capital and our
common stock repurchase program.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
Impact of Inflation
Inflation has not had a significant effect on the Company's operations during
the three fiscal years in the period ended October 2, 1999.
Year 2000
The term Y2K is used to refer to a worldwide computer-related problem where
software programs and embedded programs in computer systems will not work
properly when processing a date later than December 31, 1999. If IGT or its
customers, suppliers, or other third parties fail to make corrections for
programs that have defined dates using a two-digit year, this could result in
system failure or malfunction of certain computer equipment, software, and other
devices dependent upon computerized mechanisms that are date sensitive. This
problem may cause disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities. Assessments of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is difficult to
predict the actual impact. Recognizing this uncertainty, we have and are
continuing to actively analyze, assess, and plan for various Year 2000
contingencies across our Company.
We have undertaken various initiatives intended to ensure that our computer
equipment and software will function properly with respect to dates in and
beyond the Year 2000. Information technology ("IT") systems impacted by the Year
2000 issue include systems commonly thought of as IT systems, such as
accounting, data processing and telephone/PBX systems, as well as systems that
are not commonly thought of as IT systems, such as alarm systems, security
systems, fax machines, mail machines, automated assembly lines, and other
miscellaneous systems. Both IT and non-IT systems may contain imbedded
technology which compounds the identification, assessment, remediation, and
testing efforts.
We are utilizing both internal and external resources to accomplish our Year
2000 plan, which began in December 1997. With the exception of IGT-Australia, we
are substantially complete. We estimate that as of November 26, 1999, we had
completed approximately 95% of the initiatives necessary to fully address
potential Year 2000 issues. The remaining project efforts are underway and we
anticipate these will be completed prior to any currently anticipated impact on
our computer equipment and software.
All of our subsidiaries have performed the identification, assessment,
remediation and testing phases. We have identified our largest manufacturing
locations, IGT (North America), IGT-Australia, IGT-Japan and IGT-UK as critical
operating locations as most other subsidiaries are dependent upon these
locations. IGT uses an AS400 for the majority of its North American software
applications, including the manufacturing process, and has identified this as a
critical system. The Y2K readiness project efforts on the AS400 system are
complete. IGT-UK has finished the implementation of Oracle as an enterprise wide
improvement to its information systems and a resolution to Y2K readiness issues.
We engaged third parties to review the IGT and IGT-UK information systems plans.
Their recommendations have been incorporated into our plan. IGT-Japan utilizes a
third party to manufacture its products and has received assurance that this
manufacturer is Year 2000 ready. IGT-Australia restructured its information
systems department under a new director in the third fiscal quarter and has now
completed its assessment phase of its Year 2000 efforts. IGT-Australia's Y2K
project plan is complete with regard to internal business systems. The
remediation of their gaming systems is now fully underway and scheduled for
completion by December 15, 1999. In addition, we have assessed the risk and
reviewed Year 2000 readiness plans of Sodak (see Note 2 to Notes to Consolidated
Financial Statements). Sodak has implemented the integrated Oracle application
system as an enterprise-wide improvement to their information systems and a
resolution to Year 2000 processing requirements. The majority of their
application systems have been tested and remediated. At this stage, we believe
that our Year 2000 deficiencies will be remedied through computer equipment and
software replacement or modification in a timely fashion.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, (continued)
We have also initiated efforts to ensure the readiness of our products and
services. As part of our assessment of current products and services, we have
completed upgrading all wide-area progressive jackpot system software in all
jurisdictions. All of our customers who may have products with Year 2000
readiness issues have been notified.
We have also surveyed our key vendors and service providers to determine the
extent to which interfaces with these entities make us vulnerable to Year 2000
issues. As of November 26, 1999, we received responses from approximately 95% of
such third parties. The majority of these entities provided assurances that they
are either Year 2000 ready or expect to address all their significant Year 2000
issues on a timely basis. We continue to follow-up with significant vendors and
service providers that did not initially respond, or whose responses were deemed
unsatisfactory by us. While we have developed a system of communicating with
vendors to understand their ability to continue providing services and products
through the Year 2000 without interruption, there can be no assurance that the
systems of other companies on which we may rely will be timely converted or that
such failure to convert by another company would not have an adverse effect on
our systems.
At this time, we do not believe that the cost of our Year 2000 efforts will
exceed $3.0 million, which will be funded from operating cash flows.
Approximately $2.2 million of this total was for the replacement of
non-compliant equipment and software which we capitalized as fixed assets in
fiscal 1999. As of November 26, 1999, we spent approximately $2.4 million,
including the cost of third party reviews. Two of our subsidiaries have
implemented enterprise wide information system improvements which will also
resolve Year 2000 issues. These costs were not included in the above amount
because the implementations were not initiated specifically to resolve the Year
2000 issue. A major portion of the software remediation costs are not likely to
be incremental to our results of operations, but will represent the redeployment
of existing information technology and other resources. As a result of the
redeployment of internal resources for the Year 2000 remediation efforts,
certain enhancements of our current systems may be postponed. We do not
anticipate the postponement of these enhancements to have a significant impact
on our financial condition or results of operations.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact IGT, including, but not limited to third parties whose services we
rely upon to produce and sell our products, such as key suppliers and customers,
public utilities, telecommunication providers, financial institutions, or
certain regulators of the various jurisdictions where we do business. Failure or
interruption of any of these services could result in lost production, sales, or
administrative difficulties on the part of IGT. We believe that the
implementation of new business systems and the completion of the Year 2000
project as scheduled will significantly reduce the risk of operational
difficulties within our operating systems, facilities and products. The majority
of our application systems have been remedied and tested. In those instances
where completion by the end of 1999 is not assured, we have contingency plans in
place or that are in the final stages of development. Our Y2K contingency plans
include manual processing procedures and additional stand-by IS support staff
incorporated within our existing disaster recovery plans. Our Year 2000 project
teams are reviewing the support which may be necessary during the first week of
the new year to investigate non-functioning applications, remediate and test the
programs, and implement the corrected applications. In addition, manual back-up
procedures are being considered in user areas to ensure continuity of essential
business operations. We believe that our most reasonably likely exposure to Year
2000 readiness issues is in the IGT-Australia gaming systems. IGT-Australia is
remediating these systems and preparing a contingency plan. While we continue to
believe the Year 2000 issues will not materially affect our consolidated
financial position or results of operations, it remains uncertain as to what
extent, if any, we may be impacted.
Item 7a. Quantitative and Qualitative Factors about Market Risk
Market Risk
Under established procedures and controls, the Company enters into contractual
arrangements, or derivatives, in the ordinary course of business to hedge its
exposure to foreign exchange rate and interest rate risk. The counterparties to
these contractual arrangements are major financial institutions. Although the
Company is exposed to credit loss in the event of nonperformance by these
counterparties, management believes that losses related to counterparty credit
risk is not likely.
Foreign Currency Risk
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the monetary assets and liabilities of our operations
denominated in non-functional currency. The primary business objective of this
hedging program is to minimize the gains and losses resulting from exchange rate
changes. At October 2, 1999 and September 30, 1998, IGT had net foreign currency
transaction exposure of $41.7 million and $54.8 million, respectively. In fiscal
1999 and 1998, $38.8 million and $43.7 million of the exposure was hedged with
currency forward contracts. In addition, from time to time, we may enter into
forward exchange contracts to establish with certainty the US dollar amount of
future firm commitments denominated in a foreign currency.
Given our balanced foreign exchange position, a ten percent adverse change in
foreign exchange rates upon which these contracts are based would result in
exchange gains and losses from these contracts that would, in all material
aspects, be fully offset by exchange gains and losses on the underlying net
monetary exposures for which the contracts are designated as hedges.
As currency exchange rates change, translation of the income statements of IGT's
international businesses into US dollars affects year-over-year comparability of
operating results. IGT does not generally hedge translation risks because cash
flows from international operations are generally reinvested locally. IGT does
not enter into hedges to minimize volatility of reported earnings.
Changes in the currency exchange rates that would have the largest impact on
translating IGT's international operating results include the Australian dollar,
British pound and the Japanese yen. We estimate that a 10% change in foreign
exchange rates would impact reported operating results by less than $1.0
million. This sensitivity analysis disregards the possibility that rates can
move in opposite directions and that gains from one area may or may not be
offset by losses from another area.
Interest Rate Risk
IGT's results of operations are exposed to fluctuations in the costs of US
Government securities used to fund liabilities to jackpot winners. IGT records
gaming operations expense for future jackpots based on current rates for these
US government securities which are impacted by market interest rates and other
economic conditions. Therefore, the gross profit on gaming operations decreases
when interest rates decline. Management estimates that a 10% decline in interest
rates would impact gaming operations gross profit by $3.4 million. IGT currently
does not manage this exposure with derivative financial instruments. The $1.0
billion Senior Notes issued in May 1999 carry interest at fixed rates. If
interest rates increased by 10%, then the fair market value of the Notes would
decrease approximately $4.5 million.
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements Page
Independent Auditors' Report 35
Consolidated Statements of Income for the
years ended October 2, 1999, September 30, 1998 and 1997 36
Consolidated Balance Sheets, at October 2, 1999 and September 30, 1998 37
Consolidated Statements of Cash Flows for the
years ended October 2, 1999, September 30, 1998 and 1997 39
Consolidated Statements of Changes in Stockholders'
Equity for the years ended October 2, 1999, September 30, 1998 and 1997 41
Notes to Consolidated Financial Statements 42
Independent Auditors' Report
To the Stockholders and Board of Directors of International Game Technology:
We have audited the accompanying consolidated balance sheets of International
Game Technology and Subsidiaries (the "Company") as of October 2, 1999 and
September 30, 1998 and the related consolidated statements of income, cash flows
and changes in stockholders' equity for each of the three years in the period
ended October 2, 1999. Our audits also included the consolidated financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 2, 1999
and September 30, 1998, and the results of its operations and its cash flows for
each of the three years in the period ended October 2, 1999 in conformity with
generally accepted accounting principles. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Reno, Nevada
November 10, 1999
Consolidated Statements of Income
Years Ended
October 2, September 30, September 30,
1999 1998 1997
- ---------------------------------------------------------------------------------
(Amounts in thousands,
except per share amounts)
Revenues
Product sales $576,598 $477,024 $461,150
Gaming operations 353,064 347,099 282,820
------- ------- --------
Total revenues 929,662 824,123 743,970
------- ------- --------
Costs and Expenses
Cost of product sales 365,948 279,337 256,480
Cost of gaming operations 142,497 158,528 145,245
Selling, general and administrative 129,211 105,945 98,380
Depreciation and amortization 23,955 18,635 11,846
Research and development 45,462 38,066 31,074
Provision for bad debts 8,153 4,735 9,508
Impairment of assets and restructuring
charges 98,118 - -
-------- ------- -------
Total costs and expenses 813,344 605,246 552,533
------- ------- --------
Income from Operations 116,318 218,877 191,437
------- ------- --------
Other Income (Expense)
Interest income 55,525 45,346 41,738
Interest expense (72,764) (41,049) (30,422)
Gain on investments 5,438 1,031 12,885
Gain (loss) on the sale of assets (562) 10,115 (24)
Other (2,562) 212 (2,989)
------- ------- -------
Other income (expense), net (14,925) 15,655 21,188
------- ------- --------
Income Before Income Taxes and
Extraordinary Item 101,393 234,532 212,625
Provision for Income Taxes 36,081 82,086 75,378
------- ------- --------
Income Before Extraordinary Item 65,312 152,446 137,247
Extraordinary Loss on Early Redemption
of Debt, Net of Income Tax Benefit
of $1,640 (3,254) - -
-------- -------- --------
Net Income $ 62,058 $152,446 $137,247
======== ======== ========
Basic Earnings Per Share
Income before extraordinary item $ 0.65 $ 1.35 $ 1.14
Extraordinary loss (0.03) - -
-------- -------- --------
Net income $ 0.62 $ 1.35 $ 1.14
======== ======== ========
Diluted Earnings Per Share
Income before extraordinary item $ 0.65 $ 1.33 $ 1.13
Extraordinary loss (0.03) - -
-------- -------- --------
Net income $ 0.62 $ 1.33 $ 1.13
======== ======== ========
Weighted Average Common Shares Outstanding 99,461 113,064 120,715
Weighted Average Common and Potential
Shares Outstanding 100,238 114,703 121,829
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Balance Sheets
October 2, September 30,
1999 1998
- ----------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents $ 426,343 $ 175,413
Investment securities, at market value 18,546 19,354
Accounts receivable, net of allowances
for doubtful accounts of $8,904 and $5,512 193,479 189,521
Current maturities of long-term notes and
contracts receivable, net of allowances 74,987 63,022
Inventories, net of allowances for obsolescence
of $23,901 and $18,574:
Raw materials 60,616 73,749
Work-in-process 4,902 3,746
Finished goods 51,094 55,659
----------- -----------
Total inventories 116,612 133,154
----------- -----------
Investments to fund liabilities to jackpot
winners 27,702 41,216
Deferred income taxes 23,977 16,517
Assets held for sale 42,292 --
Prepaid expenses and other 51,302 32,346
----------- -----------
Total Current Assets 975,240 670,543
----------- -----------
Long-term notes and contracts receivable,
net of allowances and current maturities 60,870 37,750
----------- -----------
Property, plant and equipment, at cost
Land 19,938 19,406
Buildings 76,050 71,136
Gaming operations equipment 87,499 73,222
Manufacturing machinery and equipment 114,912 109,576
Leasehold improvements 5,361 4,955
----------- -----------
Total 303,760 278,295
Less accumulated depreciation and amortization (121,644) (109,542)
----------- -----------
Property, plant and equipment, net 182,116 168,753
----------- -----------
Investments to fund liabilities to jackpot winners 235,230 369,427
Deferred income taxes 89,474 131,708
Intangible assets 152,036 131,552
Other assets 70,094 33,895
----------- -----------
Total Assets $ 1,765,060 $ 1,543,628
=========== ===========
Consolidated Balance Sheets
October 2, September 30,
1999 1998
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes
payable and capital lease obligations $ 3,278 $ 30,311
Accounts payable 55,705 57,277
Jackpot liabilities 41,130 50,659
Accrued employee benefit plan liabilities 23,746 17,512
Accrued interest 30,684 1,106
Other accrued liabilities 58,013 43,675
----------- -----------
Total Current Liabilities 212,556 200,540
Long-term notes payable and capital
lease obligations, net of current maturities 990,436 322,510
Long-term jackpot liabilities 316,826 479,217
Other liabilities 3,024 85
----------- -----------
Total Liabilities 1,522,842 1,002,352
----------- -----------
Commitments and contingencies (See Note 13)
Stockholders' equity
Common stock, $.000625 par value; 320,000,000
shares authorized; 152,871,297 and 152,586,560
shares issued 96 95
Additional paid-in capital 261,941 256,656
Retained earnings 886,392 827,542
Treasury stock; 65,515,867 and 43,721,200 shares, at cost (897,234) (535,797)
Accumulated other comprehensive loss (8,977) (7,220)
----------- -----------
Total Stockholders' Equity 242,218 541,276
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,765,060 $ 1,543,628
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
Years Ended
October 2, September 30, September 30,
1999 1998 1997
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $ 62,058 $ 152,446 $ 137,247
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on debt retirement 4,894 - -
Depreciation and amortization 52,330 41,468 35,024
Amortization of discounts and deferred offering costs 879 - -
Provision for bad debts 8,153 4,735 9,508
Impairment of assets and restructuring charges 98,118 - -
Provision for inventory obsolescence 19,185 9,173 10,022
Gain on investment securities and fixed assets (4,876) (11,146) (12,861)
Common stock awards 1,005 1,973 2,636
(Increase) decrease in assets, net of effects from
acquisitions of businesses:
Receivables 17,257 8,585 (25,166)
Inventories (23,308) (54,664) (14,260)
Prepaid expenses and other (21,867) (21,696) 6,875
Other assets (8,841) 6,473 467
Net deferred income tax asset, net of tax
benefit of employee stock plans 38,165 (22,343) (29,357)
Increase in accounts payable and accrued liabilities,
net of effects from acquisitions of businesses 13,481 6,187 11,253
Earnings of unconsolidated affiliates (in excess of)
less than distributions 4,806 (14,042) (13,172)
Other - (23) (134)
--------- --------- ---------
Total adjustments 199,381 (45,320) (19,165)
--------- --------- ---------
Net cash provided by operating activities 261,439 107,126 118,082
--------- --------- ---------
Consolidated Statements of Cash Flows
Years Ended
October 2, September 30, September 30,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Investing Activities
Investment in property, plant and equipment (17,751) (16,828) (33,088)
Proceeds from sale of property, plant and equipment 2,988 24,452 6,579
Purchase of investment securities (12,510) (15,191) (27,898)
Proceeds from sale of investment securities 11,957 12,528 78,338
Proceeds from investments to fund liabilities
to jackpot winners 194,957 40,286 36,100
Purchase of investments to fund liabilities
to jackpot winners (43,589) (102,122) (113,224)
Investment in unconsolidated affiliates (26,229) (1,422) (3,379)
Acquisition of businesses (198,860) (181,764) -
----------- ----------- -----------
Net cash used in investing activities (89,037) (240,061) (56,572)
----------- ----------- -----------
Cash Flows from Financing Activities
Proceeds from long-term debt 1,636,276 624,199 63,185
Principal payments on debt (1,013,484) (430,018) (11,425)
Payments on jackpot liabilities (259,280) (40,286) (36,100)
Collections from systems to fund jackpot liabilities 86,565 138,442 141,467
Proceeds from employee stock plans 3,693 7,484 3,671
Purchases of treasury stock (361,419) (122,180) (225,474)
Penalties paid on early retirement of debt (4,658) - -
Payments of cash dividends (6,474) (13,594) (14,526)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 81,219 164,047 (79,202)
----------- ----------- -----------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (2,691) (7,470) (437)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents 250,930 23,642 (18,129)
Cash and Cash Equivalents at:
Beginning of Year 175,413 151,771 169,900
----------- ----------- -----------
End of Year $ 426,343 $ 175,413 $ 151,771
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended
October 2, September 30, September 30,
1999 1998 1997
- -------------------------------------------------------------------------------------------
(Amounts in thousands)
Common Stock
Balance at beginning of year
152,587; 151,883; and 150,690 shares $ 95 $ 95 $ 94
Employee stock plans
284; 704; and 1,193 shares 1 - 1
--------- --------- ---------
Balance at end of year
152,871 shares at 1999 $ 96 $ 95 $ 95
========= ========= =========
Additional Paid-In Capital
Balance at beginning of year $ 256,656 $ 243,950 $ 237,365
Employee stock plans 3,710 7,484 3,671
Common stock awards 1,005 1,973 2,636
Tax benefit of employee stock plans 570 3,249 278
--------- --------- ---------
Balance at end of year $ 261,941 $ 256,656 $ 243,950
========= ========= =========
Retained Earnings
Balance at beginning of year $ 827,542 $ 688,545 $ 565,491
Dividends declared (3,208) (13,449) (14,193)
Net income 62,058 152,446 137,247
--------- --------- ---------
Balance at end of year $ 886,392 $ 827,542 $ 688,545
========= ========= =========
Treasury Stock
Balance at beginning of year $(535,797) $(413,617) $(188,143)
Purchases of treasury stock (361,437) (122,180) (225,474)
--------- --------- ---------
Balance at end of year $(897,234) $(535,797) $(413,617)
========= ========= =========
Accumulated Other Comprehensive Income (Expense) (a)
Balance at beginning of year $ (7,220) $ 874 $ 8,393
Unrealized gains (losses) on securities, net of
reclassification adjustment (see Note 15) (2,340) 512 (5,497)
Foreign currency translation adjustments 583 (8,606) (2,022)
--------- --------- ---------
Balance at end of year $ (8,977) $ (7,220) $ 874
========= ========= =========
Comprehensive Income (a)
Net income $ 62,058 $ 152,446 $ 137,247
Unrealized gains (losses) on securities, net of
reclassification adjustment (see Note 15) (2,340) 512 (5,497)
Foreign currency translation adjustments 583 (8,606) (2,022)
--------- --------- ---------
Comprehensive income $ 60,301 $ 144,352 $ 129,728
========= ========= =========
(a) All items of comprehensive income and other comprehensive income are
displayed net of tax effects.
The accompanying notes are an integral part of these consolidated financial
statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
International Game Technology (referred throughout these notes, together with
its consolidated subsidiaries where appropriate, as "IGT," "the Company," "we,"
"our" and "us") was incorporated in December 1980 to acquire the gaming licensee
and operating entity, IGT, and to facilitate our initial public offering. We
operate principally in two lines of business: the development, manufacturing,
marketing and distribution of gaming products (product sales) and development,
marketing and the operation of wide-area progressive systems and gaming
equipment leasing (gaming operations). Our revenues are generated in the US and
internationally in Africa, Australia, Europe, Japan, South America and the
United Kingdom.
Gaming Product Sales
IGT manufactures domestically a broad range of microprocessor-based gaming
machines, consisting of traditional spinning reel slot machines, video gaming
machines and government-sponsored and other video gaming devices. For our
domestic and certain international markets, we offer 400 recognized trademarked
game themes. We typically sell our machines directly or through distributors to
casino operators, but may in certain circumstances finance the sale or lease of
equipment to the operator.
Gaming machines for the casino markets in Europe, South Africa and South America
are similar to the spinning reel and video games in the North American markets.
Features differ in each market but the games are generally multiple coin games
with random outcomes paid in coins returned to the customer. In some
jurisdictions, the machines pay out in the form of tickets, vouchers or tokens,
rather than coins. Gaming machines in Australia, Japan and the United Kingdom
markets, however, are produced locally and differ substantially from domestic
machines.
In addition to gaming machines, IGT develops and sells computerized casino
management systems which provide casino operators with slot and table game
accounting, player tracking and specialized bonusing capabilities. We also
develop and sell specialized proprietary systems to allow the lottery
authorities to monitor video lottery terminals. We derive revenue related to the
operation of these systems and collect license and franchise fees for the use of
the systems.
Gaming Operations
Approximately 4% of the domestic installed base of all gaming machines generate
recurring revenue including wide-area progressive systems and stand-alone
machines in which the manufacturer participates in the revenue from the machine
on a percentage or fee basis. Wide-area progressive systems are
electronically-linked, inter-casino systems that link gaming machines to a
central computer, allowing the system to build a "progressive" jackpot with
every wager made throughout the system until a player hits a winning
combination. In the North American market, IGT estimates it holds more than a
70% share of the installed base of these machines.
We have developed and operated wide-area progressive systems for over 10 years
under such brand names as Jeopardy!, Megabucks, Quartermania and Wheel of
Fortune. Wide-area progressive systems are designed to increase gaming machine
play for participating casinos by giving players the opportunity to win larger
or more frequent jackpots than on machines not linked to progressive systems.
Win (net earnings to the operator) per machine on machines linked to progressive
systems are generally higher than on stand-alone machines.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all of its majority-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Notes to Consolidated Financial Statements, (continued)
Product Sales
IGT makes product sales for cash, on normal credit terms of 90 days or less, and
over longer term installments. Generally, sales are recorded when the products
are shipped and title passes to the customer.
Gaming Operations
The following table shows the revenues from gaming operations.
Years Ended
October 2, September 30,September 30,
1999 1998 1997
-------------------------------------------------------------------------
(Dollars in thousands)
Proprietary systems $320,364 $318,499 $253,953
Lease operations 32,700 28,600 28,867
------- ------- -------
Total $353,064 $347,099 $282,820
======== ======== ========
Gaming operations revenues consist of revenues relating to the operation of the
proprietary systems, a share of the net gaming winnings from the operation of
machines at customer locations, and the lease and rental of gaming and video
lottery machines. IGT operates several proprietary systems in accordance with
joint venture agreements and accounts for this activity under the equity method.
IGT's portion of joint venture related income, net of expenses, is also included
in gaming operations revenue.
IGT's linked proprietary systems are operated domestically in Colorado,
Louisiana, Michigan, Mississippi, Missouri, Nevada, New Jersey, South Dakota and
Native American casinos, and internationally in Iceland. Stand alone versions of
some of the MegaJackpots games are also operated domestically in Colorado,
Connecticut, Illinois, Indiana, Louisiana, Nevada and on cruise ships, as well
as internationally in Ontario and Quebec.
The operation of linked progressive systems varies among jurisdictions as a
result of different gaming regulations. In all jurisdictions, the casinos pay a
percentage of the handle to fund the progressive jackpot. Funding of the
progressive jackpot differs by jurisdiction but is generally administered by
IGT. Jackpots are currently paid in equal installments over a 20 to 31 year
period or winners can elect to receive the discounted value of the jackpot in
lieu of annual installments. Jackpots on some of our newer MegaJackpots games
are paid out at the time they are won. In Atlantic City, the progressive jackpot
fund is administered by a trust managed by representatives of the participating
casinos. The trust records a liability to IGT for an annual casino licensing fee
as well as an annual machine rental fee for each machine. In Colorado, funding
of progressive jackpots is administered by a separate fund managed by IGT.
Progressive system lease fees are paid to IGT from this fund. A linked
progressive system is also operated by a trust in Iowa. IGT derives revenue
based on trust profits.
Research and Development
Research and development costs are expensed as incurred. Research and
development performed for specific customers is charged to cost of product sales
when the related sale is made.
Cash and Cash Equivalents
Cash and cash equivalents include operating cash as well as cash required for
funding current progressive systems jackpot payments and purchasing investments
to meet obligations for making payments to jackpot winners. Cash in excess of
daily requirements is generally invested in various marketable securities. If
these securities have original maturities of three months or less, they are
considered cash equivalents. Such investments are stated at cost, which
approximates market.
Notes to Consolidated Financial Statements, (continued)
Investment Securities
Our investment securities are classified as available-for-sale and stated at
market value. Unrealized gains and losses, net of income tax effects, are
excluded from income and reported as a component of accumulated other
comprehensive income. Market value is determined by the most recently traded
price of the security at the balance sheet date. Net realized gains or losses
are determined on the specific identification cost method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Depreciation and Amortization
Depreciation and amortization are provided on the straight-line method over the
following useful lives:
Buildings 39 to 40 years Gaming operations equipment 2 1/2 to 5 years
Manufacturing machinery and equipment 3 to 15 years Leasehold improvements
Term of lease Excess of cost over net assets acquired 40 years
Maintenance and repairs are expensed as incurred. The costs of improvements are
capitalized. Gains or losses on the disposition of assets are included in
income.
Long-Lived Assets
We review the carrying amount of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In fiscal 1999, our review
of the recoverability of certain long-lived and intangible assets resulted in
charges to income for the estimated impairment of these assets (see Note 7).
Investments to Fund Liabilities to Jackpot Winners
These investments represent discounted US Treasury Securities purchased to meet
obligations for making payments to linked progressive systems jackpot winners.
We have both the intent and ability to hold these investments to maturity and,
therefore, classify them as held-to-maturity. Accordingly, these investments are
stated at cost, adjusted for amortization of premiums and accretion of discounts
over the term of the security using the interest method. Securities in this
portfolio have maturity dates through 2028. Certain events during fiscal 1999
prompted IGT to sell a portion of these investments prior to maturity (see Note
4).
Other Assets
Other assets are primarily comprised of investments in joint ventures which are
accounted for under the equity method and deferred offering costs related to
Senior Notes issued in May 1999 (see Note 8). Other assets also includes
deposits and certain investments.
Earnings Per Share
Earnings per share is computed based on the weighted average number of common
and potential shares outstanding.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Notes to Consolidated Financial Statements, (continued)
Foreign Currency Translation
The functional currency of certain of IGT's international subsidiaries is the
local currency. For those subsidiaries, assets and liabilities are translated at
exchange rates in effect at the balance sheet date, and income and expense
accounts at average exchange rates during the year. Resulting translation
adjustments are recorded directly to accumulated other comprehensive income
within stockholders' equity. Gains and losses resulting from foreign currency
transactions are recorded in income. For subsidiaries whose functional currency
is the US dollar, gains and losses on non-US dollar denominated assets and
liabilities are recorded in income.
Derivatives
IGT uses derivative financial instruments to reduce our exposure resulting from
fluctuations in foreign exchange rates and interest rates. Derivative financial
instruments are used to minimize our net exposure, by currency, related to the
foreign currency denominated monetary assets and liabilities of our operations.
These gains and losses are included in income. From time to time, we may hedge
firm foreign currency commitments by entering into forward exchange contracts.
Gains and losses on these hedges are included as a component of the hedged
transaction when recorded. During fiscal 1999, IGT used interest rate swap
agreements to effectively change a variable rate liability to a fixed rate.
Amounts paid under interest rate swap agreements are accrued as interest rates
change and are recognized over the life of the agreement as an adjustment to
interest expense. The counterparties to each of these agreements are major
commercial banks. We believe that losses related to credit risk are remote.
Recently Issued Accounting Standards
On June 30, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for the first quarter of our fiscal year ending September 29, 2001. We
believe that adoption of this statement will not have a material impact on our
financial condition or results of operations.
Reclassifications
Certain amounts in the 1998 and 1997 consolidated financial statements have been
reclassified to be consistent with the presentation used in fiscal year 1999.
Year End
IGT changed its fiscal year end to the Saturday closest to September 30,
beginning with the fiscal year ended October 2, 1999. Similarly, each quarter
will end on the Saturday closest to the last day of the quarter end month.
2. Acquisitions
In September 1999, we completed the purchase of Sodak Gaming, Inc. ("Sodak"), a
South Dakota-based distributor of casino gaming products and software systems to
Native American casino and gaming operators in the US. The purchase method of
accounting for business combinations was applied to the Sodak acquisition.
Accordingly, the aggregate purchase price of $198.9 million was allocated to the
net assets of $91.3 million based on estimated fair values of the tangible
assets and liabilities at the date of acquisition. The Miss Marquette Iowa
riverboat and associated real property and assets was included in the purchase
price and net assets as an asset held for sale and was subsequently sold for
$41.7 million. We are substantially complete with our evaluation of the fair
values of these assets and liabilities and do not anticipate material
adjustments in fiscal 2000. The excess of the purchase price over the net assets
acquired totaled $107.6 million. This acquisition was funded primarily by the
issuance of Senior Notes in May 1999. Results of Sodak since the closing of the
acquisition are included in the results of operations for the year.
Notes to Consolidated Financial Statements, (continued)
The following unaudited pro forma financial information is presented as if the
Sodak acquisition had been made at the beginning of fiscal 1998 presented:
October 2, September 30,
1999 1998
---------------------------------------------------------------
(Dollars in thousands)
Total revenues $963,437 $850,028
Income before extraordinary item 65,698 144,486
Net income 62,444 144,486
Earnings per share:
Basic $ 0.63 $ 1.28
Diluted $ 0.62 $ 1.26
In June 1999, we made an investment in Access Systems Pty., LTD ("Access") of
Sydney, Australia. During fiscal 1999, we owned a minority interest in Access.
We also held options to purchase additional shares and notes convertible into
capital stock of Access. We used the equity method of accounting for this
investment. Subsequent to year end, IGT has elected to convert its equity
interests to a debt instrument in fiscal 2000.
In March 1998, we purchased Barcrest Limited ("Barcrest"), a Manchester,
England-based manufacturer and supplier of gaming related amusement devices and
purchased certain assets of Olympic Amusements Pty. Limited ("Olympic"), a
manufacturer and supplier of electronic gaming machines, gaming systems and
other gaming equipment and services to the Australian gaming market. The
purchase method of accounting for business combinations was applied to the
Barcrest and Olympic acquisitions. Accordingly, the aggregate purchase price of
$181.8 million was allocated to the net assets of $76.5 million based on
estimated fair values of the tangible assets, intangible assets and liabilities
at the dates of acquisition. The excess of the purchase price over the net
assets acquired, totaled $105.3 million (see Note 7). These acquisitions were
funded primarily with additional borrowings on a line of credit, as well as
long-term borrowings by our Australian subsidiary.
3. Investment Securities
A summary of investment securities at October 2, 1999 and September 30, 1998
follows:
Gross Gross
Net Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------
(Dollars in thousands)
October 2, 1999
US government obligations $10,010 $ - $ (60) $ 9,950
Equity securities 10,083 - (1,487) 8,596
------- ------ ------- -------
Total investment securities $20,093 $ - $(1,547) $18,546
======= ====== ======= =======
September 30, 1998
Total equity securities $17,301 $3,009 $ (956) $19,354
======= ====== ====== =======
At October 2, 1999, debt securities had maturity dates ranging from two months
to 15 years.
The proceeds from sales of available-for-sale securities were $12.0 million,
$12.5 million, and $78.3 million for fiscal 1999, 1998 and 1997. The gross
realized gains were $5.9 million, $1.1 million, and $13.6 million for fiscal
1999, 1998 and 1997. The gross realized losses were $27,000, $187,000 and
$574,000 for fiscal 1999, 1998 and 1997. In fiscal 1999, we also recognized a
$236,000 loss on an equity security deemed to be permanently impaired.
Notes to Consolidated Financial Statements, (continued)
4. Investments to Fund Liabilities to Jackpot Winners
A summary of investments held to fund liabilities to jackpot winners at October
2, 1999 and September 30, 1998 follows:
Amortized Gross Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------------
(Dollars in thousands)
October 2, 1999
Total US government obligations $262,932 $10,202 $(4,892) $268,242
======== ======= ======= ========
September 30, 1998
Total US government obligations $410,643 $59,383 $(4,126) $465,900
======== ======= ======= ========
Federal legislation passed in October 1998 permits jackpot winners to receive
the discounted value of progressive jackpots won in lieu of annual installments.
For jackpots won prior to the effective date of the legislation, the winner was
able to make this election after July 1, 1999. Upon a winner's election after
July 1, 1999, investments held by IGT to fund the winner's liability were sold
to settle the liability. The offer for these past winners to elect a single cash
payment has now expired and we do not anticipate additional sales of these held
to maturity investments.
The proceeds from sales of held-to-maturity securities were $154.1 million for
fiscal 1999. The gross realized gains were $5.7 million. The gross realized
losses were $2.0 million. All proceeds from the sale of these securities were
paid to jackpot winners. Therefore, the net realized gain was offset by an equal
loss on the settlement of winner liabilities.
5. Notes and Contracts Receivable
IGT grants customers extended payment terms under contracts of sale. These
contracts are generally for terms of one to five years, with interest recognized
at prevailing rates, and are secured by the related equipment sold.
IGT has provided loans, principally for financial assistance, to several
customers. With the recent acquisition of Sodak, our portfolio of this type of
loan has increased. The balance of such loans totaled $18.5 million at October
2, 1999 and $2.1 million at September 30, 1998. Allowances for doubtful loans at
October 2, 1999 were $58,000 and zero at September 30, 1998. These loans are
generally for terms of one to five years with interest at prevailing rates. The
following table represents the estimated future collections of notes and
contracts receivable, net of allowances, at October 2, 1999.
Fiscal Year Estimated Receipts
--------------------------------------------
(Dollars in thousands)
2000 $ 74,987
2001 40,145
2002 10,687
2003 3,999
2004 5,650
Thereafter 389
--------
$135,857
========
Notes to Consolidated Financial Statements, (continued)
At October 2, 1999 and September 30, 1998, the following allowances for doubtful
notes and contracts were netted against current and long-term maturities:
October 2, September 30,
1999 1998
------------------------------------------------------
(Dollars in thousands)
Current $14,157 $10,602
Long-term 5,497 6,126
------- -------
$19,654 $16,728
======= =======
6. Concentrations of Credit Risk
The financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. At October 2, 1999, we had bank deposits in
excess of insured limits of approximately $63.2 million.
Product sales and the resulting receivables are concentrated in specific
legalized gaming regions. We also distribute a portion of our products through
third party distributors resulting in significant distributor receivables.
Accounts, contracts, and notes receivable by region as a percentage of total
receivables at October 2, 1999 are as follows:
---------------------------------------------------
Region
Nevada 22%
Native American casinos 21%
Other US regions including joint ventures 15%
South America 8%
Atlantic City (distributor and other) 7%
Europe 7%
Australia 6%
Riverboats (greater Mississippi River area) 4%
Other regions (individually less than 3%) 10%
----
Total 100%
====
In September 1993, we sold our equity ownership interest in CMS-International
("CMS") to Summit Casinos-Nevada, Inc. ("Summit"), whose owners include senior
management of CMS. During fiscal 1999, we remained as guarantor on certain
indebtedness of CMS, which at October 2, 1999, had an aggregate outstanding
balance of $14.4 million, including principal and accrued interest. CMS is now
under new ownership. On November 5, 1999, we purchased the notes from the lender
and restructured the terms with the new owners. The revised notes call for
monthly payments of principal and interest and have a maturity date of December
31, 2008. The notes remain collateralized by the respective casino properties.
At this time we do not believe a reserve against these notes is necessary.
Notes to Consolidated Financial Statements, (continued)
7. Intangible Assets and Restructuring Charges
Intangible assets consist of the following:
October 2, September 30,
1999 1998
--------------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 1,650 $ 37,129
Excess of cost over net assets
acquired 153,209 98,778
-------- --------
154,859 135,907
Less accumulated amortization (2,823) (4,355)
-------- --------
$152,036 $131,552
======== ========
During fiscal 1999, our intangible assets increased by $107.6 million with the
acquisition of Sodak, offset by a decrease of $86.8 million from the write-off
of intangible assets related to Olympic.
We recorded approximately $100 million in intangible assets with the purchase of
Olympic. Soon after the acquisition, IGT-Australia experienced difficulties
assimilating Olympic with its existing operations due to several factors
including: an employee strike which forced us to accelerate the closure of the
Melbourne plant; the resignation of two Managing Directors and the appointment
of the current Managing Director in March 1999; and significant turnover
throughout the company. As a result, an integration plan was not adequately
designed or implemented. Product difficulties were also experienced, including:
numerous machine platforms and multiple games on these platforms creating
complexity in our Australian product offering; difficulty obtaining game
approval due to regulatory delays; and the inability to meet our customers'
demands for new products due to poor game performance in the market. While we
lost significant market share and customer confidence, our competition prospered
in this strong market. During the third quarter, the current Managing Director
initiated business changes, however, the financial losses worsened. In the
fourth quarter, the forecasted outlook continued to decline and we realized
IGT-Australia would not recover from the difficulties experienced with the
Olympic acquisition. The recoverability of the intangible assets was evaluated.
Based on our review, we determined the impairment of the intangible assets to be
their total unamortized value of $86.8 million and recorded this charge in the
fourth quarter along with restructuring charges of $6.0 million, including a
$4.0 million inventory obsolescence charge and $2.0 million in asset and
facility redundancy costs.
We also recorded impairment charges of $5.3 million in fiscal 1999, relating to
changes in our recoverability assessment of inventory and receivables in Brazil.
The government in Brazil recently rescinded the law allowing gaming devices in
bingo halls throughout this market.
8. Notes Payable and Capital Lease Obligations
Notes payable and capital lease obligations consist of the following:
October 2, September 30,
1999 1998
------------------------------------------------------------------------
(Dollars in thousands)
Senior notes, net of unamortized discount $990,436 $ 85,700
Lines of credit 3,278 195,913
Australian facility agreement - 71,196
Capital lease obligations - 12
------- -------
Total 993,714 352,821
Less current maturities 3,278 30,311
------- -------
Long-term notes payable and capital lease
obligations, net of current maturities $990,436 $322,510
======== ========
Notes to Consolidated Financial Statements, (continued)
Senior Notes
In May 1999, IGT completed the private placement of $1.0 billion in aggregate
principal amount of Senior Notes pursuant to rule 144A under the Securities Act
of 1933. The Senior Notes were issued in two tranches: $400 million aggregate
principal amount of 7.875% Senior Notes, due May 15, 2004, priced at 99.053% and
$600 million aggregate principal amount of 8.375% Senior Notes, due May 15,
2009, priced at 98.974%. In August 1999, we exchanged all outstanding 7.875%
Senior Notes due 2004 and all outstanding 8.375% Senior Notes due 2009 for
identical registered notes. A portion of the proceeds was used to redeem
previously outstanding 7.84% Senior Notes due 2004. This resulted in a
prepayment penalty of $3.3 million after tax, and is reflected in the income
statement as an extraordinary expense. Additionally, we repaid outstanding
borrowings under both our US revolving bank credit facility and our Australian
credit facility and settled a forward equity share repurchase of 4.9 million
shares of our common stock. The remaining net proceeds from the offering were
used to finance our acquisition of Sodak and to fund working capital and our
common stock repurchase program.
Credit Facilities
Our domestic and foreign facilities totaled $276.3 million at October 2, 1999.
Of this amount, $3.3 million was drawn, $3.2 million was reserved for letters of
credit and the remaining $269.8 million was available. We are required to comply
with certain covenants contained in these agreements which, among other things,
limit financial commitments we may make without the written consent of the
lenders and require the maintenance of certain financial ratios. At October 2,
1999, we were in compliance with all applicable covenants.
Capital Leases
At October 2, 1999, we had no equipment under capital lease. The cost of
equipment under capital leases at September 30, 1998 was $155,000 and the
related accumulated depreciation was $103,000.
The following table represents the future fiscal year principal payments of the
notes at October 2, 1999:
Fiscal Year Principal Payments
-------------------------------------------------
(Dollars in thousands)
2000 $ 3,278
2001 -
2002 -
2003 -
2004 400,000
2005 and after 600,000
----------
Total principal payments 1,003,278
Less unamortized discount (9,564)
----------
Net notes payable $ 993,714
==========
Notes to Consolidated Financial Statements, (continued)
9. Commitments
We lease certain of our facilities and equipment under various agreements for
periods through the year 2006. The following table shows the future minimum
rental payments required under these operating and capital leases which have
initial or remaining non-cancelable lease terms in excess of one year as of
October 2, 1999.
Operating
Fiscal Year Leases
----------------------------------------------
(Dollars in thousands)
2000 $ 6,590
2001 4,618
2002 2,753
2003 803
2004 382
2005 and after 470
-------
Total minimum payments $15,616
=======
Certain of the facility leases provide that we pay utilities, maintenance,
property taxes, and certain other operating expenses applicable to the leased
property, including liability and property damage insurance. The lease term for
our previous manufacturing facility in Reno, Nevada extends through February
2003 and the related payments are included in the schedule above. We have sublet
approximately half of this facility to third parties. The terms of the sublease
agreements call for payments of $3.3 million for the period of October 1999
through February 2003. We previously accrued for the future gross lease payments
of these abandoned buildings, net of anticipated sublease receipts, and do not
anticipate additional impact on our results of operations.
The total rental expense was approximately $6.0 million for fiscal 1999, $5.1
million for fiscal 1998 and $3.6 million for fiscal 1997.
10. Jackpot Liabilities
IGT receives a percentage of the amounts wagered or machine rental and service
fees from the linked progressive systems to fund the related jackpot payments.
Winners may elect to receive a single payment of the discounted value of the
jackpot won or annual installments. Equal annual installments are paid over 20
to 31 years without interest.
The following schedule sets forth the future fiscal year payments for the
jackpot winners under these systems at October 2, 1999:
Fiscal Year Payments
--------------------------------------------
(Dollars in thousands)
2000 $ 30,882
2001 27,533
2002 27,533
2003 27,490
2004 27,363
2005 and after 290,860
--------
$431,661
========
Notes to Consolidated Financial Statements, (continued)
Jackpot liabilities include discounted payments due to winners for jackpots won
and amounts accrued for jackpots not yet won that are contractual obligations of
IGT. Jackpot liabilities consist of the following:
October 2, September 30,
1999 1998
----------------------------------------------------------------------------
(Dollars in thousands)
Gross payments due to jackpot winners $ 431,661 $ 691,224
Unamortized discount on payments to
jackpot winners (162,609) (277,859)
Accrual for jackpots not yet won 88,904 116,511
-------- --------
Total jackpot liabilities 357,956 529,876
Less current liabilities (41,130) (50,659)
-------- --------
Long-term jackpot liabilities $316,826 $ 479,217
======== =========
We amortize the discounts on the jackpot liabilities to interest expense. During
fiscal 1999, 1998 and 1997, we recorded interest expense on jackpot liabilities
of $25.9 million, $25.6 million and $21.2 million. We were required to maintain
cash and investments relating to systems liabilities totaling $54.6 million at
October 2, 1999 and $65.3 million at September 30, 1998.
11. Financial Instruments
IGT uses derivative financial instruments for the purpose of reducing its
exposure to adverse fluctuations in interest and foreign exchange rates. While
these hedging instruments are subject to fluctuations in value, such
fluctuations are generally offset by the value of the underlying exposures being
hedged. The Company is not a party to leveraged derivatives and does not hold or
issue financial instruments for speculative purposes.
Foreign Currency Management
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the monetary assets and liabilities of our operations
denominated in non-functional currency. The primary business objective of this
hedging program is to minimize the gains and losses resulting from exchange rate
changes. At October 2, 1999 and September 30, 1998, we had net foreign currency
transaction exposure of $41.7 million and $54.8 million, respectively. In fiscal
1999 and 1998, $38.8 million and $43.7 million was hedged with currency forward
contracts. In addition, from time to time, the Company may enter into forward
exchange contracts to establish with certainty the US dollar amount of future
firm commitments denominated in a foreign currency.
Interest Rate Management
In fiscal 1999, the Company effectively converted variable rate debt in
Australia to fixed rate debt using an interest rate swap agreement with three
counterparties. These swaps, which were required under the Australia facility
agreement, had quarterly interest settlement dates. During fiscal 1999, the
Australia facility agreement was paid in full. As a result, these swaps were
settled. No gains or losses were recorded on the settlement.
Other Off-Balance Sheet Instruments
In the normal course of business, IGT is a party to financial instruments with
off-balance-sheet risk such as performance bonds and other guarantees, which are
not reflected in the accompanying balance sheets. We had performance bonds
outstanding that related to our operation of two lottery systems and a gaming
machine route totaling $2.3 million at October 2, 1999 and $2.2 million at
September 30, 1998. IGT is liable to reimburse the bond issuer in the event the
bond is exercised as a result of our non-performance. We had outstanding letters
of credit, issued under our line of credit (see Note 8), totaling $3.2 million
at October 2, 1999 and $2.9 million at September 30, 1998, which were issued to
insure payment by IGT to certain vendors and governmental agencies. Management
does not expect any material losses to result from these off-balance-sheet
instruments.
Notes to Consolidated Financial Statements, (continued)
At October 2, 1999, we had no foreign currency contracts to hedge firm
commitments. At September 30, 1998, IGT had foreign currency contracts to hedge
firm commitments in the amount of $1.2 million in Australia. The gain or loss on
these instruments was deferred and was recognized in income when the hedged
transactions occur. At September 30, 1998, the unrealized gains/losses on these
instruments, which mature within six months, were immaterial to the consolidated
financial statements.
The following table presents the carrying amount and estimated fair value of
IGT's financial instruments:
October 2, September 30,
1999 1998
------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------------------------------------------
(Dollars in thousands)
Assets
Cash and cash equivalents $426,343 $426,343 $175,413 $175,413
Investment securities 18,546 18,546 19,354 19,354
Notes and contracts receivable 135,857 125,581 100,772 103,301
Investments to fund liabilities to
jackpot winners 262,932 268,242 410,643 465,900
Liabilities
Jackpot liabilities 357,956 363,267 529,876 584,924
Notes payable and capital lease
obligations 993,714 955,778 352,821 358,778
Foreign currency contracts
On balance sheet 38,813 39,860 43,737 43,779
Off balance sheet - - 1,200 1,199
The carrying value of cash and cash equivalents approximates fair value because
of the short-term maturity of those instruments. The estimated fair value of
investment securities and investments to fund liabilities to jackpot winners are
based on quoted market prices. The estimated fair value of jackpot liabilities
is based on quoted market prices of investments which upon maturity will be used
to fund these liabilities. The fair value of the Company's notes and contracts
receivable is estimated by discounting the future cash flows using interest
rates determined by management to reflect the credit risk and remaining
maturities of the related notes and contracts. The estimated fair value of the
registered Senior Notes at October 2, 1999, included in notes payable and
capital lease obligations, is based on quoted market prices for an instrument
with similar terms. At September 30, 1998, the estimated fair value of the
Senior Notes, included in notes payable and capital lease obligations, was based
on the yield required at the respective year end of a private placement of
similar terms and credit valuation. The carrying value of the lines of credit,
also included in notes payable and capital lease obligations, approximates fair
value. The estimated fair value of foreign currency contracts is based on quoted
market prices for an instrument with terms similar to the contract at year end.
Notes to Consolidated Financial Statements, (continued)
12. Earnings Per Share
Effective October 1, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." Weighted average shares for the year ended September 30, 1997 has been
restated in accordance with SFAS No. 128. The following table shows the
reconciliation of basic earnings per share ("EPS") to diluted EPS, for income
before extraordinary item at years ended:
October 2, September 30, September 30,
1999 1998 1997
----------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Income before extraordinary item $ 65,312 $152,446 $137,247
Weighted average common shares
outstanding 99,461 113,064 120,715
Dilutive effect of stock options
outstanding 777 1,639 1,114
-------- -------- --------
Weighted average common and potential
shares outstanding 100,238 114,703 121,829
======== ======== ========
Basic earnings per share $ 0.65 $ 1.35 $ 1.14
Diluted earnings per share $ 0.65 $ 1.33 $ 1.13
Options to purchase 1.3 million, 159,000 and 127,000 shares of common stock at
October 2, 1999, September 30, 1998 and 1997, were not included in the
computation of year-to-date diluted EPS because the options' exercise price was
greater than the average market price of the common shares. We have purchased a
total of 761,000 shares, or approximately 1%, of our outstanding common stock
during the period from October 3, 1999 to November 10, 1999. There were no other
transactions in the same period which would have materially changed the number
of common shares or potential common shares outstanding.
13. Contingencies
IGT has been named in and has brought lawsuits in the normal course of business.
We do not expect the outcome of these suits, including the lawsuits described
below, to have a material adverse effect on our financial position or results of
future operations.
Ahern
Along with a number of other public gaming corporations, IGT is a defendant in
three class action lawsuits: one filed in the United States District Court of
Nevada, Southern Division, entitled Larry Schreier v. Caesar's World, Inc., et
al;, and two filed in the United States District Court of Florida, Orlando
Division, entitled Poulos v. Caesar's World, Inc., et al. and Ahern v. Caesar's
World, Inc., et al., which have been consolidated into a single action. The
Court granted the defendants' motion to transfer venue of the consolidated
action to Las Vegas. The actions allege that the defendants have engaged in
fraudulent and misleading conduct by inducing people to play video poker
machines and electronic slot machines, based on false beliefs concerning how the
machines operate and the extent to which there is an opportunity to win on a
given play. The amended complaint alleges that the defendants' acts constitute
violations of the Racketeer Influenced and Corrupt Organizations Act, and also
give rise to claims for common law fraud and unjust enrichment, and seeks
compensatory, special, consequential, incidental and punitive damages of several
billion dollars. In December 1997, the Court denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed the
action pending Nevada gaming regulatory action. The defendants filed their
consolidated answer to the Consolidated Amended Complaint on February 11, 1998.
At this time, motions concerning class certification are pending before the
Court.
Notes to Consolidated Financial Statements, (continued)
WMS
In May 1994, WMS Industries, Inc. instituted a declaratory judgment action (the
"Model 400 Action") against IGT, in the United States District Court for the
Northern District of Illinois. The action sought a declaration that a certain
patent issued in 1984 and owned by IGT (the "Telnaes Patent") was invalid and
that certain reel-type slot machines then made by WMS did not infringe the
Telnaes Patent. We counterclaimed alleging that the Telnaes Patent was infringed
by WMS' reel-type slot machines.
In September 1996, the Trial Court reached a decision in favor of IGT, finding
the Telnaes Patent valid, finding WMS' model 400 slot machine to infringe the
Telnaes Patent, in which we sought a preliminary and permanent injunction and
treble damages. In July 1999, the US Court of Appeals for the Federal Circuit
affirmed the Trial Court's decision that the Telnaes Patent is valid and that
the WMS model 400 slot machine infringed the patent. The Court affirmed the
damages awarded of approximately $10 million plus accrued interest. Still
unresolved is whether the damages award will be trebled, and whether IGT will be
entitled to collect its attorney's fees and costs from WMS. Trebling of the
damages is dependent on whether the infringement was willful. These issues have
been remanded to the District Court for further findings.
In November 1996, we commenced an action against WMS in the Trial Court seeking
a judgment declaring that WMS' Model 401 slot machine also infringed the Telnaes
patent. In December 1996, the Court granted our motion for a preliminary
injunction and enjoined WMS from the manufacture, use and sale of the Model 401
slot machine. WMS filed a notice of appeal on May 7, 1998. In July 1999, in a
second suit on WMS' Model 401 machine that was heard by the Federal Circuit
Court of Appeals at the same time, the Court reversed the District Court's
granting of a preliminary injunction to IGT prohibiting the make, use or sale of
WMS' Model 401 machine. The Appellate Court ruled that a different
interpretation of the patent claims than that made by the District Court was
appropriate. This case has also been remanded to the District Court for further
findings in view of the Appellate Court's claim interpretation.
Bally
In July 1999, Bally Gaming, Inc. filed a complaint against IGT in the United
States District Court for the District of New Jersey alleging that certain
wide-area progressive system agreements we entered into with customers in
Atlantic City, New Jersey violate federal and New Jersey antitrust laws. The
complaint sought declaratory and injunctive relief and damages. IGT and Bally
executed a memorandum of understanding resolving all outstanding claims and the
complaint was dismissed with prejudice in September 1999.
14. Income Taxes
SFAS No. 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred income taxes reflect the net tax
effects of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The Company
determines the net current deferred tax asset or liability and the net
noncurrent asset or liability separately for federal, state, and foreign
jurisdictions.
Notes to Consolidated Financial Statements, (continued)
The effective income tax rates differ from the statutory United States federal
income tax rates as follows for the years ended:
October 2, September 30,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
Taxes at federal statutory rate $35,488 35.0% $82,086 35.0% $74,419 35.0%
Foreign subsidiaries tax 3,657 3.6 591 0.3 (158) 0.0
State income tax, net 2,670 2.6 2,049 0.9 2,084 1.0
Research and development credits (2,192) (2.2) (247) (0.1) - 0.0
Valuation allowance, IGT-Australia 6,067 6.0 - 0.0 - 0.0
Expiration of tax contingencies (5,344) (5.3) (1,163) (0.5) 123 0.1
Adjustment to estimated income tax accruals (3,306) (3.3) 272 0.1 294 0.1
Other, net (959) (0.8) (1,502) (0.7) (1,384) (0.7)
------- ----- ------- ----- ------- ------
Provision for income taxes $36,081 35.6% $82,086 35.0 % $75,378 35.5 %
======= ===== ======== ===== ======= ======
Components of the provision for income taxes were as follows for the years
ended:
October 2, September 30,
1999 1998 1997
-----------------------------------------------------------------
(Dollars in thousands)
Current
Federal $(11,602) $106,431 $102,171
State 358 4,657 3,632
Foreign 9,118 2,922 1,652
------- ------- ------
Total current (2,126) 114,010 107,455
------- ------- -------
Deferred
Federal 30,761 (30,862) (30,283)
State 1,566 (2,149) (308)
Foreign 5,880 1,087 (1,486)
------- ------- ------
Total deferred 38,207 (31,924) (32,077)
------- ------- -------
Provision for income taxes $36,081 $82,086 $75,378
======= ======= =======
Notes to Consolidated Financial Statements, (continued)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
October 2, September 30,
1999 1998
- ----------------------------------------------------------------------------------
(Dollars in thousands)
Current deferred tax assets
Reserves not currently deductible $ 18,819 $ 13,208
Reserve differential for gaming activities - 2,315
Foreign subsidiaries 883 687
Unrealized loss on investment securities 542 -
Other 3,733 1,062
Current deferred tax liabilities
Unrealized gain on investment securities - (719)
Other - (36)
--------- ---------
Net current deferred tax asset 23,977 16,517
--------- ---------
Non-current deferred tax assets
Reserves not currently deductible 824 -
Reserve differential for gaming activities 64,669 122,407
Foreign subsidiaries 6,161 5,328
State income taxes 3,349 4,368
Amortization of goodwill 28,380 -
Other 3,111 7,655
Non-current deferred tax liabilities
Difference between book and tax basis of property (7,027) (5,793)
Amortization of goodwill (1,599) (1,732)
Other (2,327) (525)
--------- ---------
Total net non-current deferred tax asset 95,541 131,708
Valuation allowance (6,067) -
--------- ---------
Net non-current deferred tax asset 89,474 131,708
--------- ---------
Net deferred tax asset $ 113,451 $ 148,225
========= =========
Due to the uncertainty of the realization of certain deferred tax assets related
to IGT-Australia, IGT has established a valuation allowance in the amount of
$6.1 million.
Notes to Consolidated Financial Statements, (continued)
15. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, which requires the reporting
of comprehensive income and its components in the financial statements. We
adopted this Statement beginning October 1, 1998. This Statement also requires
that we classify items of other comprehensive income by their nature in an
annual financial statement. The components of IGT's other comprehensive income
are as follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended October 2, 1999
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period $ 266 $ (93) $ 173
Less: reclassification adjustment for gains (losses)
realized in net income 3,866 (1,353) 2,513
-------- -------- --------
Net unrealized gains (losses) (3,600) 1,260 (2,340)
Foreign currency translation adjustments 897 (314) 583
-------- -------- --------
Other comprehensive income (expense) $ (2,703) $ 946 $ (1,757)
======== ======== ========
Year ended September 30, 1998
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period $ 1,822 $ (638) $ 1,184
Less: reclassification adjustment for gains (losses)
realized in net income 1,034 (362) 672
-------- -------- --------
Net unrealized gains (losses) 788 (276) 512
Foreign currency translation adjustments (13,240) 4,634 (8,606)
-------- -------- --------
Other comprehensive income (expense) $(12,452) $ 4,358 $ (8,094)
======== ======== ========
Year ended September 30, 1997
Unrealized gains (losses)on securities:
Unrealized holding gains (losses) arising during
period $ 225 $ (79) $ 146
Less: reclassification adjustment for gains (losses)
realized in net income 8,681 (3,038) 5,643
-------- -------- --------
Net unrealized gains (losses) (8,456) 2,959 (5,497)
Foreign currency translation adjustments (3,111) 1,089 (2,022)
-------- -------- --------
Other comprehensive income (expense) $(11,567) $ 4,048 $ (7,519)
======== ======== ========
Notes to Consolidated Financial Statements, (continued)
Accumulated Other Comprehensive Income Balances
Accumulated
Unrealized Foreign Other
Gains (Losses) Currency Comprehensive
on Securities Translation Income
- -------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended October 2, 1999
Beginning balance $ 1,334 $(8,554) $(7,220)
Current-period change (2,340) 583 (1,757)
------- ------- -------
Ending balance $(1,006) $(7,971) $(8,977)
======= ======= =======
Year ended September 30, 1998
Beginning balance $ 822 $ 52 $ 874
Current-period change 512 (8,606) (8,094)
------- ------- -------
Ending balance $ 1,334 $(8,554) $(7,220)
======= ======= =======
Year ended September 30, 1997
Beginning balance $ 6,319 $ 2,074 $ 8,393
Current-period change (5,497) (2,022) (7,519)
------- ------- -------
Ending balance $ 822 $ 52 $ 874
======= ======= =======
16. Employee Benefit Plans
Employee Incentive Plans
IGT provides the following three employee incentive plans: profit sharing and
401(k) plan, cash sharing and management bonus. Total annual contributions from
operating profits for all three plans for the fiscal years ended 1999, 1998 and
1997 were $27.1 million, $26.5 million and $23.6 million.
The profit sharing and 401(k) plan was adopted for IGT employees working in the
US. IGT matches 75% of an employee's contributions up to $1,000. This allows for
maximum annual company matching contributions of $750 to each employee's
account. Participants are 100% vested in their contributions and IGT's matching
contributions. The remaining portion of IGT's contributions vest over a seven
year period of employment.
The cash sharing plan is distributed semi-annually in May and November to all
non IGT-Australia, IGT-Japan and Barcrest-Japan employees. The management
bonuses are paid out annually to key employees throughout the Company.
Effective September 1, 1999, IGT implemented a non-qualified deferred
compensation plan to provide an unfunded incentive compensation arrangement for
eligible management and highly compensated employees. Participants may elect to
defer up to 50% of their annual base salary, 50% of cash sharing, 50% of
discretionary management bonus and 50% of commissions with a minimum deferral of
$2,000. Distributions can be paid out as short-term payments or at retirement.
Retirement benefits can be paid out as a lump sum or in annual installments over
a term of up to 15 years.
Stock-Based Compensation Plans
IGT has three stock-based compensation plans, which are described below.
Notes to Consolidated Financial Statements, (continued)
Employee Stock Purchase Plan
In 1987, IGT adopted a Qualified Employee Stock Purchase Plan. Under this Plan,
each eligible employee may be granted an option to purchase a specific number of
shares of IGT's common stock. The term of each option is 12 months, and the
exercise date is the last day of the option period. Employees who have completed
90 days of service with IGT are eligible. Highly compensated employees receiving
more than $80,000 in annual compensation were excluded from participating in the
Plan in prior years. In March 1999, the shareholders approved an amendment to
the Plan to allow highly compensated employees to participate in the Plan.
Employees who are 5% or more shareholders and employees of certain subsidiaries
are excluded.
An aggregate of 2.4 million shares may be made available under this plan.
Employees may participate in this plan only through payroll deductions up to a
maximum of 10% of their base pay. The option price is equal to the lesser of 85%
of the fair market value of the common stock on the date of grant or on the date
of exercise. At October 2, 1999, 614,000 shares were available under this plan.
Restricted Stock Awards
In March 1996, 600,000 shares were issued to six employees at a price of $.01
per share. These restricted stock awards vest in increments over a five year
period. Dividends on the shares issued are paid to the employees. IGT has the
option to repurchase the unvested shares issued to the employees at $.01 per
share if the employees terminate employment with IGT before the shares have
vested.
Stock Option Plans
In 1981, IGT adopted a Stock Option Plan where non-qualified and incentive stock
options may be granted to domestic and foreign employees. Under this Plan, there
were 27.1 million shares available for grant. The Plan expired in December 1996.
In 1993, IGT adopted an additional Stock Option Plan which permits non-qualified
and incentive stock option awards for up to 5.0 million shares and additional
non-qualified stock option awards to non-employee directors for up to 250,000
shares. In March of 1999, shareholders approved an increase in the number of
awards permitted under the 1993 plan to 8.5 million shares.
Options have been granted at fair market value on the date of grant and, except
for non-employee director options, typically vest ratably over five years
although a shorter period may be provided, and expire 10 years subsequent to the
grant.
In February 1997, IGT amended the 1993 Stock Option Plan to permit the grant of
restricted stock awards of a fixed number of shares to participants determined
by IGT's Board of Directors. Restricted stock awarded to a participant may not
be voluntarily or involuntarily sold, assigned, transferred, pledged or
encumbered during the restricted period. Shares awarded to participants in
fiscal 1999, 1998 and 1997 totaled 50,000, 10,000 and 200,000 shares, at a price
of $.01 per share. The shares vest in increments over a five year period.
Notes to Consolidated Financial Statements, (continued)
At October 2, 1999, options to purchase 3.5 million shares were available for
grant under the plans.
Number Weighted Average
of Shares Exercise Price
-----------------------------------------------------------------------------
Outstanding at September 30, 1996 4,251,035 $12.64
Granted 1,876,361 $18.07
Forfeited or expired (271,557) $13.98
Exercised (299,102) $ 8.56
--------
Outstanding at September 30, 1997 5,556,737 $14.56
Granted 809,617 $23.30
Forfeited or expired (170,984) $17.63
Exercised (617,742) $10.27
--------
Outstanding at September 30, 1998 5,577,628 $16.19
Granted 500,499 $17.83
Forfeited or expired (280,822) $17.57
Exercised (179,636) $20.09
--------
Outstanding at October 2, 1999 5,617,669 $16.43
=========
Options exercisable at October 2, 1999 3,217,047 $15.14
Options exercisable at September 30,
1998 2,540,732 $14.25
1997 2,366,978 $12.76
Notes to Consolidated Financial Statements, (continued)
The following table summarizes information for stock options outstanding and
exercisable at October 2, 1999 in order to assess the number and timing of
shares that may be issued and the cash that may be received as a result of
options exercised:
Outstanding Exercisable
----------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------
$ 1.79 - $12.75 766,532 5.4 $12.05 537,653 $11.98
12.88 - 13.25 1,508,985 6.4 13.24 1,294,385 13.25
13.63 - 17.63 1,575,855 7.3 16.44 821,885 16.08
17.69 - 28.50 1,766,297 8.1 21.05 563,124 21.17
--------- ---------
$ 1.79 - $28.55 5,617,669 7.0 $16.43 3,217,047 $15.14
========= =========
Valuation of Stock-Based Compensation Plans
IGT adopted SFAS No. 123, "Accounting for Stock-Based Compensation" on October
1, 1996. As permitted by SFAS No. 123, the Company continues to apply Accounting
Principles Board Opinion No. 25 to its stock-based compensation. Accordingly, no
compensation expense has been recognized for the stock option and employee stock
purchase plans. The compensation expense that has been charged against income
for the restricted stock award plan was $1.0 million, $2.0 million and $2.6
million for fiscal 1999, 1998 and 1997. SFAS No. 123 requires compensation
expense to be measured based on the fair value of the equity instrument awarded.
If compensation expense for IGT's three stock-based compensation plans had been
determined in accordance with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts shown below
for the years ended:
October 2, September 30,
1999 1998 1997
------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Net income
As reported $62,058 $152,446 $137,247
Pro forma 57,793 146,948 132,506
Basic earnings per share
As reported $ 0.62 $ 1.35 $ 1.14
Pro forma 0.58 1.30 1.10
Diluted earnings per share
As reported $ 0.62 $ 1.33 $ 1.13
Pro forma 0.58 1.28 1.10
Weighted average fair value of options
granted during the year $ 7.76 $ 8.27 $ 6.27
Weighted average fair value of restricted stock
awards granted during the year $ 17.82 $ 23.75 $ 18.24
The fair value for stock-based compensation was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997: interest rates (zero-coupon US government
issues with an average remaining life of 1.67 years) of 5.5%, 5.6% and 5.6%;
dividend yields of .14%, .47% and .71%; volatility factors of the expected
market price of IGT's common stock of .45, .35 and .44; weighted-average
expected life of stock options of 1.67 years and an expected life of 1.0 years
for employee stock purchases.
Notes to Consolidated Financial Statements, (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
IGT's employee stock based compensation has characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock based compensation.
17. Related Party Transactions
Related party transactions included in the consolidated financial statements are
as follows:
October 2, September 30,
1999 1998 1997
- ------------------------------------------------------------------------
(Dollars in thousands)
Years Ended
Total revenues $97,017 $84,994 $35,601
As of
Accounts receivable $29,667 $ 8,205 $25,433
Current maturities of long-term notes
and contracts receivable - - 1,831
Long-term notes and contracts receivable - 4 123
Joint Ventures
We operate certain MegaJackpot systems under joint marketing alliances (the
"Ventures") with various gaming or gaming related companies. Activities of these
Ventures include placement of progressive system and other participation games
and pursuit of video lottery opportunities. IGT owns a 50% share in each of the
Ventures and recognized net revenues of $78.3 million during fiscal 1999. During
the year, $62.3 million in asset and expense transfers and $22.3 million in
capital contributions were made to the Ventures. At October 2, 1999, the Company
had accounts receivable balances from these Ventures of $28.2 million. The
largest aggregate amount of indebtedness outstanding at any time during the year
was $28.2 million.
We apply the equity method of accounting to the joint ventures. Summarized
financial information from the Spin for Cash Joint Venture and Master License
Agreement with Anchor Gaming (the "Anchor joint venture"), our largest joint
venture partner, is as follows for the years ended:
October 2, September 30,September 30,
1999 1998 1997
----------------------------------------------------------------------
(Dollars in thousands)
Revenues $293,460 $246,851 $60,672
Expenses 145,572 117,294 31,202
Operating income 147,888 129,557 29,470
Net income 149,958 130,979 29,148
Notes to Consolidated Financial Statements, (continued)
October 2, September 30,
As of 1999 1998
--------------------------------------------------------------------
(Dollars in thousands)
Total assets $199,943 $171,742
Total liabilities 123,133 107,815
Total equity 76,810 63,927
Other Related Parties
During fiscal 1997, a member of our Board of Directors was an officer of, and
had an equity interest in, a Nevada gaming business from which the Company
recognized revenues of $956,000. He is also a director and officer of the parent
company of additional gaming businesses, from which we recognized revenues of
$18.7 million in fiscal 1999, $19.8 million in fiscal 1998 and $21.5 million in
fiscal 1997. IGT had contracts and accounts receivable balances from these
businesses of $1.5 million at October 2, 1999 and $1.3 million at September 30,
1998. The largest aggregate amount of contracts and accounts receivable
outstanding at anytime during the year was $1.8 million.
18. Supplemental Statement of Cash Flows and Other Information
Supplemental Statement of Cash Flows
Certain noncash investing and financing activities are not reflected in the
consolidated statements of cash flows.
No notes or capital lease obligations were issued to obtain property, plant and
equipment in fiscal 1999 and 1998. We incurred $12,000 in capital lease
obligations to obtain property, plant and equipment in fiscal 1997.
We manufacture gaming machines which are used on our proprietary systems and are
leased to customers under operating leases. As the net result of transfers
between inventory and fixed assets, property, plant and equipment increased
$32.9 million in fiscal 1999, $17.3 million in fiscal 1998 and $11.0 million in
fiscal 1997.
The Company had dividends declared, but not yet paid, totaling $3.3 million and
$3.4 million at September 30, 1998 and 1997.
The tax benefit of stock options and the employee stock purchase plan totaled
$570,000 in fiscal 1999, $3.2 million in fiscal 1998 and $278,000 in fiscal
1997.
Payments of interest were $42.6 million in fiscal 1999, $41.2 million in fiscal
1998 and $30.5 million in fiscal 1997. Payments for income taxes were $28.0
million in fiscal 1999, $101.2 million in fiscal 1998 and $97.0 million in
fiscal 1997.
In conjunction with acquisitions of businesses during the current year (see Note
2), the fair value of assets acquired totaled $129.7 million and the fair value
of liabilities assumed totaled $38.4 million. In conjunction with acquisitions
of businesses during fiscal 1998, the fair value of assets acquired totaled
$100.1 million and the fair value of liabilities assumed totaled $23.6 million.
Stock Repurchase Plan
A stock repurchase plan was originally authorized by our Board of Directors in
October 1990. As of November 10, 1999, IGT could purchase an additional 25.7
million shares under the authorization as modified by the Board of Directors.
During fiscal 1999, we repurchased 21.8 million shares for an aggregate purchase
price of $361.4 million. During fiscal 1998, we repurchased 5.5 million shares
for an aggregate purchase price of $122.2 million. During the period of October
3, 1999 through November 10, 1999, we purchased 761,000 shares for an aggregate
purchase price of $14.4 million.
Notes to Consolidated Financial Statements, (continued)
19. Business Segments
IGT operates principally in two lines of business: (1) the development,
manufacturing, marketing and distribution of gaming products, what we refer to
as "Gaming Product Sales," and (2) the development, marketing and operation of
wide-area progressive systems, what we refer to as "Gaming Operations."
Years Ended
October 2, September 30, September 30,
1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Revenues
Manufacture of gaming products $ 576,598 $ 477,024 $ 461,150
Gaming operations 353,064 347,099 282,820
----------- ----------- -----------
Total $ 929,662 $ 824,123 $ 743,970
=========== =========== ===========
Operating Profit
Manufacture of gaming products $ (46,913) $ 80,999 $ 105,629
Gaming operations 185,804 172,696 118,638
----------- ----------- -----------
Total 138,891 253,695 224,267
----------- ----------- -----------
Other expense, including interest
expense (37,498) (19,163) (11,642)
----------- ----------- -----------
Income Before Income Taxes and
Extraordinary Item $ 101,393 $ 234,532 $ 212,625
=========== =========== ===========
Depreciation and Amortization
Manufacture of gaming products $ 12,386 $ 9,928 $ 4,900
Gaming operations 22,953 18,017 19,683
Corporate 16,991 13,523 10,441
----------- ----------- -----------
Total $ 52,330 $ 41,468 $ 35,024
=========== =========== ===========
Identifiable Assets
Manufacture of gaming products $ 700,684 $ 638,618 $ 460,104
Gaming operations 594,964 754,849 600,918
Corporate 469,412 150,161 154,030
----------- ----------- -----------
Total $ 1,765,060 $ 1,543,628 $ 1,215,052
=========== =========== ===========
Notes to Consolidated Financial Statements, (continued)
IGT's operations are based in the United States and internationally. The table
below presents information as to our operations by these two regions for the
years ended:
October 2, September 30,
1999 1998 1997
--------------------------------------------------------------------------
(Dollars in thousands)
Revenues
Domestic
Unaffiliated customers $ 666,685 $ 634,695 $ 601,934
Inter-area transfers 39,395 36,809 30,455
International
Unaffiliated customers 262,977 189,428 142,036
Inter-area transfers 10,935 7,023 -
Eliminations (50,330) (43,832) (30,455)
---------- ---------- ----------
Total $ 929,662 $ 824,123 $ 743,970
========== ========== ==========
Operating Profit
Domestic $ 223,428 $ 217,180 $ 205,099
International (84,537) 36,515 19,168
---------- ---------- ----------
Total 138,891 253,695 224,267
Other expense, including
interest expense (37,498) (19,163) (11,642)
---------- ---------- ----------
Income Before Income Taxes and
Extraordinary Item $ 101,393 $ 234,532 $ 212,625
========== ========== ==========
Identifiable Assets
Domestic $1,528,934 $1,235,868 $1,092,317
International 236,126 307,760 122,735
---------- ---------- ----------
Total $1,765,060 $1,543,628 $1,215,052
========== ========== ==========
On a consolidated basis we do not recognize intersegment revenues or expenses
upon the transfer of gaming products between subsidiaries. Operating profit is
revenue and interest income related to investments to fund jackpot liabilities
less cost of sales and operating expenses, including related operating
depreciation and amortization, provisions for bad debts, and an allocation of a
portion of selling, general and administrative and research and development
expenses. Other expense includes interest expense, interest income and gain
(loss) on sale of assets.
We did not have sales to a single customer which exceeded 10% of revenues during
fiscal 1999, 1998 or 1997.
Notes to Consolidated Financial Statements, (continued)
20. Selected Quarterly Financial Data (Unaudited)
First Qtr Second Qtr Third Qtr Fourth Qtr
- ---------------------------------------------------------------------------
(Dollars in thousands, except per share
amounts and stock prices)
1999
Total revenues $ 221,706 $ 220,871 $ 258,859 $ 228,226
Gross profit 96,319 101,223 118,761 104,914
Income from operations (loss) 48,394 50,429 63,334 (45,839)
Net income (loss) 34,444 33,831 34,267 (40,484)
Diluted earnings (loss) per
share $ 0.32 $ 0.32 $ 0.36 $ (0.45)
Stock price
High $24 1/2 $23 7/16 $19 1/2 $19 1/4
Low $16 1/2 $14 3/8 $14 11/16 $16 3/16
1998
Total revenues $ 165,011 $ 182,090 $ 222,982 $ 254,040
Gross profit 75,800 89,398 106,954 114,103
Income from operations 42,786 53,223 60,210 62,658
Net income 29,665 35,492 45,595 41,694
Diluted earnings per share $ .26 $ .31 $ .40 $ .37
Stock price
High $26 13/16 $26 3/16 $28 9/16 $28 7/8
Low $21 7/8 $23 3/116 $23 5/8 $18 1/2
1997
Total revenues $ 189,381 $ 164,371 $ 163,849 $ 226,369
Gross profit 86,892 78,084 75,918 101,347
Income from operations 49,774 40,023 41,899 59,741
Net income 33,668 27,714 34,472 41,393
Diluted earnings per share $ .27 $ .22 $ .29 $ .36
Stock price
High $23 1/2 $19 3/4 $19 1/8 $23 1/4
Low $17 5/8 $16 1/4 $15 3/8 $16 1/2
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
The information required by Items 10, 11, 12 and 13 is incorporated by reference
from the 1999 Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days of the end of the fiscal year covered by this report.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements:
Reference is made to the Index to Financial Statements and Related
Information under Item 8 in Part II hereof where these documents are
listed.
(a)(2) Consolidated Financial Statement Schedule: Page
II Valuation and Qualifying Accounts 72
Other financial statement schedules are either not required or the
required information is included in the Consolidated Financial
Statements or Notes thereto.
Parent Company Financial Statements - Financial Statements of the
Registrant only are omitted under Rule 3-05 as modified by ASR 302.
(a)(3) Exhibits:
3.1 Articles of Incorporation of International Game Technology, as amended
(incorporated by reference to Exhibit 3.1 to Registrants Report on Form
10-K for the year ended September 30, 1995).
3.2 Second Restated Code of Bylaws of International Game Technology, dated
November 11, 1987 (incorporated by reference to Exhibit 3.2 to Registrants
Report on Form 10-K for the year ended September 30, 1995).
4.1 Note Agreement for the 7.84% Senior Notes due September 1, 2004
(incorporated by reference to Exhibit 4.1 to Registrant's Report on Form
10-K for the year ended September 30, 1995).
4.2 Indenture, dated as of May 19, 1999 by and between International Game
Technology and The Bank of New York (incorporated by reference to Exhibit
4.2 to Registration Statement No. 333-81257, Form S-4 filed by
Registrant).
4.3 Registration Rights Agreement, dated as of May 11, 1999, by and among
International Game Technology, Salomon Smith Barney Inc., BNY Capital
Markets, Inc., Goldman, Sachs & Co., Lehman Brothers Inc. and Merrill
Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by reference to
Exhibit 4.3 to Registration Statement No.
333-81257, Form S-4 filed by Registrant).
10.1 Stock Option Plan for Key Employees of International Game Technology, as
amended (incorporated by reference to Exhibit 10.26 to Registration
Statement No. 33-12610 filed by Registrant).
10.2 International Game Technology 1993 Stock Option Plan (incorporated by
reference to Exhibit A to the Proxy Statement for the 1997 Annual Meeting
of Shareholders).
10.3 Employee Stock Purchase Plan (incorporated by reference to Exhibit A to
the Proxy Statement for the 1998 Annual Meeting of Shareholders).
10.4 Employment Agreement with Robert A. Bittman, Executive Vice President,
Product Development dated March 12, 1996 (incorporated by reference to
Exhibit 10.9 to Registrants Report on Form 10-K for the year ended
September 30, 1996).
10.5 Form of officers and directors indemnification agreement (incorporated by
reference to Exhibit 10.10 to Registrants Report on Form 10-K for the year
ended September 30, 1996).
10.6 Credit Agreement by and among International Game Technology and the Bank
of New York, Wells Fargo and other banks, dated May 22, 1997 (incorporated
by reference to Exhibit 10.11 to Registrant's Report on Form 10-Q for the
quarter ended June 30, 1997).
10.6A Amendment No. 1 to Credit Agreement by and among International Game
Technology, The Bank of New York, Wells Fargo and other banks, dated
August 19, 1997 (incorporated by reference to Exhibit 10.7A to
Registration Statement No. 333-81257, Form S-4 filed by Registrant).
10.6B Amendment No. 2 to Credit Agreement by and among International Game
Technology, The Bank of New York, Wells Fargo and other banks, dated
January 16, 1998 (incorporated by reference to Exhibit 10.7B to
Registration Statement No. 333-81257, Form S-4 filed by Registrant).
10.6C Amendment No. 3 to Credit Agreement by and among International Game
Technology, The Bank of New York, Wells Fargo and other banks, dated April
20, 1999 (incorporated by reference to Exhibit 10.7C to Registration
Statement No. 333-81257, Form S-4 filed by Registrant).
10.6D Amendment and Restatement of Credit Agreement by and among International
Game Technology, The Bank of New York, Wells Fargo and other banks, dated
April 30, 1999 (incorporated by reference to Exhibit 10.7D to Registration
Statement No. 333-81257, Form S-4 filed by Registrant).
10.7 Employment Agreement with G. Thomas Baker, President, Chief Operating
Officer dated March 12, 1997. (incorporated by reference to exhibit 10.8
to Registrants Report on Form 10-K for the year ended September 30, 1997).
10.8 Facility Agreement between I.G.T. (Australia) Pty. Limited and National
Australia Bank Limited, dated March 18, 1998; guarantee from International
Game Technology to National Australia Bank Limited, dated March 18, 1998
(incorporated by reference to Exhibit 10.9 to Registrant's Report on Form
10-Q for the quarter ended March 31, 1998).
10.9 Joint Venture Agreement, dated December 3, 1996 by and between
International Game Technology and Anchor Games, a d.b.a. of Anchor Coin
(incorporated by reference to Exhibit 10.10 to Registrant's Report on
Form 10-K for the year ended September 30, 1998).
10.10 IGT Profit Sharing Plan (As Amended and Restated as of December 31, 1998)
(incorporated by reference to Exhibit 10.11 to Registrant's Report on Form
10-Q for the quarter ended April 3, 1999).
10.11 Agreement and Plan of Merger, dated March 10, 1999, among International
Game Technology, SAC, Inc. and Sodak Gaming, Inc. (incorporated by
reference to Registrant's Report on Form 8-K dated March 12, 1999).
10.12 Amendment Notes between Silver Club and CMS-El Capitan and International
Game Technology dated November 5, 1999.
21 Subsidiaries
23 Independent Auditors' Consent
24 Power of Attorney (see page 71 hereof)
27 Financial data schedule
(b) Reports on Form 8-K
The Company filed current reports on Form 8-K dated December 23, 1998,
March 12, 1999, April 29, 1999, July 22, 1999 and September 1, 1999 to
announce the completion of the acquisition of Sodak.
99.1 Financial statements of Spin for Cash Joint Venture and Master License
Agreement for the years ended September 30, 1999, 1998 and 1997.
Power of Attorney
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 7th day of
December, 1999.
International Game Technology
By:/s/ Maureen T. Mullarkey
Maureen T. Mullarkey
Vice President, Finance and
Chief Financial Officer
Each person whose signature appears below hereby authorizes Maureen Mullarkey
and Sara Beth Brown, or either of them, as attorneys-in-fact to sign on his
behalf, individually, and in each capacity stated below, and to file all
amendments and/or supplements to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Charles N. Mathewson Chairman of the Board of Directors and December 7, 1999
Charles N. Mathewson Chief Executive Officer
/s/ G. Thomas Baker President and Chief Operating Officer December 7, 1999
G. Thomas Baker
/s/ Maureen T. Mullarkey Vice President, Finance and December 7, 1999
Maureen T. Mullarkey Chief Financial Officer
/s/ Albert J. Crosson Director and Vice Chairman of the December 7, 1999
Albert J. Crosson Board of Directors
/s/ John J. Russell Director December 7, 1999
John J. Russell
/s/ Warren L. Nelson Director December 7, 1999
Warren L. Nelson
/s/ Wilbur K. Keating Director December 7, 1999
Wilbur K. Keating
/s/ Frederick B. Rentschler Director December 7, 1999
Frederick B. Rentschler
/s/ Claudine B. Williams Director December 7, 1999
Claudine B. Williams
/s/Rockwell A. Schnabel Director December 7, 1999
Rockwell A. Schnabel
SCHEDULE II - Consolidated Valuation and Qualifying Accounts
Balance at Increase (Decrease) Balance
Beginning in at End
of Period Provisions Unrealized Gains of Period
- --------------------------------------------------------------------------------
(Dollars in thousands)
Valuation Allowance on
Investment Securities:
Year ended 09/30/97 $9,722 $ - $(8,457) $ 1,265
====== ==== ======= =======
Year ended 09/30/98 $1,265 $ - $ 788 $ 2,053
====== ==== ======= =======
Year ended 10/02/99 $2,053 $ - $(3,600) $(1,547)
====== ==== ======= =======
Balance at Accounts Balance
Beginning Written at End
of Period Provisions Recoveries Off of Period
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for
Doubtful Accounts:
Year ended 09/30/97 $ 5,681 $4,597 $236 $4,615 $ 5,899
======= ====== ==== ====== =======
Year ended 09/30/98 $ 5,899 $ 927 $351 $1,665 $ 5,512
======= ====== ==== ====== =======
Year ended 10/02/99 $ 5,512 $3,959 $ 6 $ 573 $ 8,904
======= ====== ==== ====== =======
Allowance for
Doubtful Notes and
Contracts Receivable:
Year ended 09/30/97 $19,775 $4,911 $211 $6,668 $18,229
======= ====== ==== ====== =======
Year ended 09/30/98 $18,229 $3,808 $246 $5,555 $16,728
======= ====== ==== ====== =======
Year ended 10/02/99 $16,728 $4,194 $291 $1,559 $19,654
======= ====== ==== ====== =======
Balance at Disposed Balance
Beginning of and at End
of Period Provisions Written Off of Period
- --------------------------------------------------------------------------------
(Dollars in thousands)
Obsolete Inventory Reserve:
Year ended 09/30/97 $18,165 $11,381 $14,665 $14,881
======= ======= ======= =======
Year ended 09/30/98 $14,881 $ 9,173 $ 5,480 $18,574
======= ======= ======= =======
Year ended 10/02/99 $18,574 $19,185 $13,858 $23,901
======= ======= ======= =======